Answered: Calculate the WACC.

Business

Accounting

Calculate the WACC.

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter17: Multinational Capital Structure And Cost Of Capital

Section: Chapter Questions

Problem 13QA

See similar textbooks

Related questions

Q: A firm's stock has a beta of 1.75, Treasury bills yield 3.8%, and the market portfolio offers an…

A: Weighted average cost of capital is the combined cost of both debt and equity for the business.

Q: what is BC’s WACC? The firm’s tax rate is 20%.

A: Expected rate=risk free rate+Beta*market risk premium After-tax cost of debt=10*(1-tax rate)…

Q: Your company is financed 30% with debt and 70% with equity. The internal rate of return on the…

Q: Calculating the WACC In the previous problem, suppose the company's stock has a beta of 1.10. The…

A: Capital structure refers to the proportion of debt and equity capital raised by the company in order…

Q: PTCL has the following capital structure, which it consider to be optimal : debt =25%, preferred…

A: Calculation of cost of debt, preferred stock and common stock: Excel workings:

Q: A firm has a capital structure containing 60% debt and 40% common stock equity. ITs outstanding…

A: Part (1): Computation of required return on equity: Answer: Firm’s required return on equity is…

Q: Currently, Bloom Flowers Inc. has a capital structure consisting of20% debt and 80% equity. Bloom's…

A: Weighted Average Cost of Capital is an indicator of the combined cost of debt and equity capital…

Q: A firm's stock has a beta of 1.75, Treasury bills yield 3.8%, and the market portfolio offers an…

A: The Capital Asset Pricing Model is used to determine the cost of equity with the help of following…

Q: A firm has a debt-to-equity ratio of 1:1. The firm’s debt beta is 0.3. Five-year government bonds…

A: Debt to equity ratio = 1:1 Hence, weight of debt = weight of equity = 0.5 Risk free rate (Rf) = 5%…

Q: CP India Ltd has the following capital structure, which it considers optimal: Debt 25% Preference…

A: WACC (Weighted Avg. Cost of Capital) is avg. cost of financing capital structure of the firm. It is…

Q: hat is your expectation of the market P/E ratio?

A: P/E Ratio: It is the ratio of the firm's share price to its EPS (earnings per share). A higher P/E…

Q: The market value of Fords' equity, preferred stock, and debt are $6 billion, $2 billion, and $11…

A: Weighted Average Cost of Capital (WACC) is the rate at which the company is willing to pay to its…

Q: Booher Book Stores has a beta of 0.5. The yield on a 3-month T-bill is 3%, and the yield on a…

A: Given Information Beta of stock = 0.5 Yield on 3 month T bill = 3% Yield on 10 year bond = 8%…

Q: What is a firm's weighted-average cost of capital if the stock has a beta of 2.45, Treasury bills…

A: The weighted average cost of capital is calculated to determine the average cost of raising funds…

Q: Company needs ghc1000 to finance its activities. The firm can finance this expenditure either by…

A: Given Information: Funds required by the company for its activities - ghc1000 Finance can be done…

Q: dust Telecommunications, Inc has the following target capital structure, which it considers to be…

A: Weighted average cost of capital is the weighted cost of equity, preferred stock and debt to be used…

Q: The following information is provided: average annual rate of return for common stocks is 8.0%, •…

A: Market risk premium depicts the excess of the return generated by investing in equities over the…

Q: Wiley, Inc., an MNC, has a beta of 1.3. The U.S. stock market is expected to generate an annual…

A: The question can be answered by determining the expected cost of equity using the capital asset…

Q: A Company is 40% financed by risk-free debt. The interest rate is 8%, the expected market risk…

A: Assumption:The risk-free rate of return is assumed as 8%.

Q: 1. The total market value of the equity of Living Inc. is $6 million, and the total value of its…

A: Weighted average cost of capital WACC gives the firms combined cost of capital, including the…

Q: AllCity, Inc., is financed 42% with debt, 7% with preferred stock, and 51% with common stock. Its…

A: WACC: It represents the average cost of capital for the firm. It is calculated by the sum of all…

Q: eturn of Sandhill Cyclicals common shares is 1.2 times as sensitive to macroeconomic information as…

A: Given information :

Q: 8. You have the following information about Burgundy Basins, a sink manufacturer. Equity shares…

A: Financial Management: Financial management comprises of two words i.e. Finance and management.…

Q: You know that the return of Wildhorse Cyclicals common shares is 1.1 times as sensitive to…

A: Given:Return of wildhorse cyclicals common shares is 1.1 times as sensitive to the return on…

Q: you have a capital structure consisting of 30% debt and 70% equity. There is an 8% yield to…

A: Debt = 30% Equity = 70% YTM = 8% Risk Free Rate = 5% Market Risk Premium = 6% Cost of Equity = 12.5%…

Q: 4. Please consider the following company items: Other items 25% 0.60 0.30 BBB Tax rate Unlevered…

A: Weighted Average Cost of Capital of the firm, which represent their cost of capital for all the…

Q: You are given the market values of CHAR’s capital structure as follow: $52 million in total common…

A: Total Market value of capital structure = total common equity + debt + preferred stock = 52 + 20 + 8…

Q: Suppose Simmons' common stock has a beta of 1.37, the risk-free rate is 3.4% and the market risk…

A: Cost of equity is calculated by CAPM: Cost of equity = Rf + ß*(Rm-Rf) Weight of equity = 1/(1+D/E…

Q: Consider the estimated beta values as of June 30, 2011, for the followingcompanies:…

A: Capital Asset Pricing Model or CAPM used to describe for the relationship between an expected return…

Q: Company A's historical returns for the past three years are 6 percent, 15 percent, and 15 percent.…

A: The capital asset pricing model is a financial concept that is widely used. In this model, the…

Q: 30. AllCity, Inc., is financed 40% with debt, 10% with preferred stock, and 50% with common stock.…

A: Concept. WACC is weighted average cost of capital. It is commonly referred to as firm's cost of…

Q: BAsed on these inputs, estimate the price/book value ratio for NCH. B. How much would the return on…

A: Information Provided: Dividends paid = $2.00 per share Earnings = $4.00 per share Book value per…

Q: Currently, Forever Flowers Inc. has a capital structure consisting of 30% debt and 70% equity.…

A: Hi There, Thanks for posting the question. But as per our guidelines, we should answer the first…

Q: Pixieedust Telecommunications, Inc has the following target capital structure, which it considers to…

A: Preferred Stock is that type of stock that possesses both equities and debt features. It is also…

Q: Answer the following questions given the information below: Equity Information 40 million shares…

A: The question is related to cost of equity, debt and after- tax cost of debt weights and WACC.…

Q: The following were gathered for estimating the cost of equity of KKK Corporation: Return on Treasury…

A: Here, Return on Treasury Bond (Rf) is 4% Return on Market (Rm) is 10% Beta is 1.2

Q: Ethier Enterprise has an unlevered beta of 0.5. Ethier is financed with 25% debt and has a levered…

A: Given, Unlevered Beta = 0.50 Debt = 25%, Levered Beta = 0.6 Risk free rate = 3.50% Market risk…

Q: Barton Industries estimates its cost of common equity by using three approaches: the CAPM, the…

A: CAPM = Risk free rate + beta * market risk premium Bond yield plus risk premium = Bond yield + risk…

Concept explainers

Treasury Market

On-the-run securities are the most recently issued securities in the market depth and are therefore traded at some premium. The off-the-run securities are the ones issued just before the most recent ones. The on-the-run securities have a lower yield to the investor than the off-the-run securities.

Question

You are given the following information:

D = Debt

E = Equity

D/E = Target debt-to-equity = 40%

T = Corporate marginal tax rate = 30%

Cost of Debt = 6%

R_f = Risk free rate = 10-year U.S. treasury bond rate = 2.0%

R_m = Return on a broad based stock index

R_m – R_f = Equity risk premium = 5.0%

β_l = Levered beta (from finance.yahoo.com) = 1.5

Calculate the WACC.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.

Similar questions

A company had WACC (weighted average cost of capital) equal to 8. % If the company pays off mortgage bonds with an interest rate of 4% and issues an equal amount of new stock considered to be relatively risky by the market, which of the following is true? a. residual income will increase. b. ROI will decrease. c. WACC will increase. d. WACC will decrease.
A company’s equity is valued at $10 million and debt is valued at $2 million. Its bonds tradeat the risk-free rate of 2%. If its WACC is 12.2% and its CAPM equity beta is 0.8, what must be theexpected rate of return on market portfolio? Assume that tax rate is 40%.
Consider a firm whose debt has a market value of $35 million and whose stock has a market value of $55 million. The firm pays a 7 percent rate of interest on its new debt and has a beta of 1.23. The corporate tax rate is 21%. Assume that the security market line holds, that the risk premium on the market is 10.5 percent, and that the current Treasury bill is rate is 1 percent. Using the pretax cost of debt from Question 7, what is the cost of equity, RS?
A firm's stock has a beta of 1.75, Treasury bills yield 3.8%, and the market portfolio offers an expected return of 9.5%. In addition to equity, the firm finances 26% of its assets with debt that has a yield to maturity of 7.4%. The firm is in the 28% marginal tax bracket. What is the company’s after tax cost of debt?
A) For questions A, B, and C, use the following information: Consider a firm whose debt has a market value of $35 million and whose stock has a market value of $55 million. The firm pays a 7 percent rate of interest on its new debt and has a beta of 1.23. The corporate tax rate is 21%. Assume that the security market line holds, that the risk premium on the market is 10.5 percent, and that the current Treasury bill is rate is 1 percent. What is the aftertax cost of debt? Format as a percentage and round to two places past the decimal point as "X.XX B) Consider a firm whose debt has a market value of $35 million and whose stock has a market value of $55 million. The firm pays a 7 percent rate of interest on its new debt and has a beta of 1.23. The corporate tax rate is 21%. Assume that the security market line holds, that the risk premium on the market is 10.5 percent, and that the current Treasury bill is rate is 1 percent. Using the pretax cost of debt from Question 7, what is the…
A company is considering its optimal capital structure. The firm currently has 1 million shares outstanding at $ 20 per share (tax rate = 40%) and a debt balance of $5 million. Currently, its (levered) beta is 1.5 and its ERP is 5.5%. The current risk-free rate is 5%. Your research indicate the following ratings and pre-tax cost of debt across the different debt ratios: D/(D+E) Rating Pre-tax cost of debt 0% AAA 10% 10% AA 10.5% 20% A 11% 30% BBB 12% 40% BB 13% 50% B 14% 60% CCC 16% 70% CC 18% 80% C 20% 90% D 25% a. Using the optimal WACC approach, what is the firm's optimal debt ratio? b. Calculate the company's unlevered value, assuming that the probability of default is 5% and the company loses 30% of its value in the event of a default.
A firm's stock has a beta of 1.75, Treasury bills yield 3.8%, and the market portfolio offers an expected return of 9.5%. In addition to equity, the firm finances 26% of its assets with debt that has a yield to maturity of 7.4%. The firm is in the 28% marginal tax bracket. Calculate the weighted average cost of capital.
Currently, Forever Flowers Inc. has a capital structure consisting of 30% debt and 70% equity. Forever's debt currently has an 7% yield to maturity. The risk-free rate (rRF) is 4%, and the market risk premium (rM - rRF) is 5%. Using the CAPM, Forever estimates that its cost of equity is currently 13%. The company has a 25% tax rate. What is Forever's current WACC? Round your answer to two decimal places. % What is the current beta on Forever's common stock? Round your answer to two decimal places. What would Forever's beta be if the company had no debt in its capital structure? (That is, what is Forever's unlevered beta, bU?) Do not round intermediate calculations. Round your answer to two decimal places. Forever's financial staff is considering changing its capital structure to 40% debt and 60% equity. If the company went ahead with the proposed change, the yield to maturity on the company's bonds would rise to 9.5%. The proposed change will have no effect on the…
Barton Industries estimates its cost of common equity by using three approaches: the CAPM, the bond-yield-plus-risk-premium approach, and the DCF model. Barton expects next year's annual dividend, D1, to be $2.40 and it expects dividends to grow at a constant rate gL = 5.8%. The firm's current common stock price, P0, is $21.00. The current risk-free rate, rRF, = 4.8%; the market risk premium, RPM, = 6.1%, and the firm's stock has a current beta, b, = 1.2. Assume that the firm's cost of debt, rd, is 10.57%. The firm uses a 4.1% risk premium when arriving at a ballpark estimate of its cost of equity using the bond-yield-plus-risk-premium approach. What is the firm's cost of equity using each of these three approaches? Do not round intermediate calculations. Round your answers to two decimal places. CAPM cost of equity: % Bond-Yield-Plus-Risk-Premium: % DCF cost of equity: % If you are equally confident of all three methods, then what is the best estimate of the firm’s cost of…
Morrison Medical Inc., an all-equity firm, has earnings before interest and taxes of $950,000, an un-levered beta of .80 and a tax rate = 35%. In the market, you observe that Government T-bills are being sold to yield 2% and the S&P/TSX Composite Index is expected to yield 9%. Assume a world with taxes and a cost for the risk of default. All general M&M assumptions apply. You have also been provided the following information: Value of Debt Cost of Debt (Rd) Beta PV of Financial Distress Costs $ 0 - .80 0 $ 5,000,000 5.5% ? $800,000 $ 7,000,000 7.0% 2 ? What is the market value of the firm? What is the market value of the firm and the market value of the equity if they issue $5,000,000 in debt with a coupon rate of 4.5% and use the proceeds to repurchase shares? What is the new cost of equity? According to CAPM, what is the new beta? What is the market value of the firm if the firm issues $7,000,000 in debt? What would be the PV of financial distress costs if…