Consider the Firm XYZ, with the following information, AND show all work to solve the subsequent parts: • Marginal corporate tax rate of XYZ is 34% • The company wants to maintain its current capital structure, which is 40% equity, 20% preferred stock, and 40% debt. • Firm XYZ has a beta of 0.8, the yield on Treasury bonds is 1.3%, and the expected return on the market portfolio is 6%. The current stock price is $44.37, and the firm has just paid an annual dividend of $1.28, which is expected to grow by 4% per year. New equity would come from retained earnings, which would eliminate flotation costs. The firm's preferred stock pays an annual dividend of $4.10 in perpetuity, and each share is currently priced at $135.26. New stock would be issued by private placement with no flotation costs. The firm has one bond issuance outstanding, with a coupon rate of 6%, paid semiannually, with 10 years to maturity, and $864.10 as the current price. New bonds would be issued by private placement with no flotation costs. a) What is the formula for WACC? b) What is the cost of debt for the firm?

Consider the Firm XYZ, with the following information, AND show all work to solve the subsequent parts: • Marginal corporate tax rate of XYZ is 34% • The company wants to maintain its current capital structure, which is 40% equity, 20% preferred stock, and 40% debt. • Firm XYZ has a beta of 0.8, the yield on Treasury bonds is 1.3%, and the expected return on the market portfolio is 6%. The current stock price is $44.37, and the firm has just paid an annual dividend of $1.28, which is expected to grow by 4% per year. New equity would come from retained earnings, which would eliminate flotation costs. The firm's preferred stock pays an annual dividend of $4.10 in perpetuity, and each share is currently priced at $135.26. New stock would be issued by private placement with no flotation costs. The firm has one bond issuance outstanding, with a coupon rate of 6%, paid semiannually, with 10 years to maturity, and $864.10 as the current price. New bonds would be issued by private placement with no flotation costs. a) What is the formula for WACC? b) What is the cost of debt for the firm?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter17: Dynamic Capital Structures And Corporate Valuation

Section: Chapter Questions

Problem 3P

See similar textbooks

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.
Liu Industries is a highly levered firm. Suppose there is a large probability that Liu will default on its debt. The value of Lius operations is 4 million. The firms debt consists of 1-year, zero coupon bonds with a face value of 2 million. Lius volatility, , is 0.60, and the risk-free rate rRF is 6%. Because Lius debt is risky, its equity is like a call option and can be valued with the Black-Scholes Option Pricing Model (OPM). (See Chapter 8 for details of the OPM.) (1) What are the values of Lius stock and debt? What is the yield on the debt? (2) What are the values of Lius stock and debt for volatilities of 0.40 and 0.80? What are yields on the debt? (3) What incentives might the manager of Liu have if she understands the relationship between equity value and volatility? What might debtholders do in response?
If the financial Manager of Evergreen wants to decrease its cost of capital by adding more debt to its capital structure and arrive at a debt-equity ratio of 0.60. If its debt is in the form of a 6% semiannual bond issue outstanding with 15 years to maturity. The bond currently sells for 95% of its face value of $1000. On the other hand, suppose the risk-free rate is 3% and the market portfolio has an expected return of 9% and the company has a beta of 2. If the tax rate is 40%. Question 1 Calculate the company,s after-tax cost of debt. Question 2 Calculate the company,s cost of equity. Question 3 What would be the company’s overall cost of capital (WACC) at the targeted capital structure of debt equity ratio of 0.60? Question 4 If the company achieves this new cost of capital, would your investment decision change regarding the previous two investment opportunities? Explain your answer.
Rolex, Inc. has equity with a market value of $20 million and debt with a market value of $10million. Assume the firm has no default risk and can borrow at the risk-free interest rate. Therisk-free interest rate is 5 percent per year, and the expected return on the market portfolio is11 percent. The beta of the company's equity is 1.2. The tax rate is 20%. What is the cost ofcapital for an otherwise identical all-equity firm? handwrite please
The firm Summer! Has a market capitalization of 800 and debt with a market value of 200. The equity beta is 1. the debt beta is 0, and the riskiness of the tax shield equals the riskiness of the assets. The all equity firm NewSummer! is in a similar line of business and has expected cash flows after tax of 80 in perpetuity (starting next year. The corporate tax rate is 30% and there are no personal taxes. The riskfree rate is 4% and the expected rate of return on the market portfolio is 9%. You have been asked to look into the implications of adding debt to the capital structure of NewSummer: You decide to investigate two debt policies. Policy 1 involves having a constant debt to value ratio of 50%. The debt will be risk free. Policy 2 involves having a fixed amount of debt of 500 in perpetuity, which can be issued at par with a coupon of 4%. Required: Calculate the market values immediately after the change in capital structure. calculate the following questions a) under policy 1 what…
What is a firm's weighted-average cost of capital if the stock has a beta of 2.45, Treasury bills yield 5%, and the market portfolio offers an expected return of 14%? In addition to equity, the firm finances 30% of its assets with debt that has a yield to maturity of 9%. The firm is in the 35% marginal tax bracket. In order to earn full credit, you must show your work and calculations
Clifford Chance is a large U.K. firm with the before tax cost of debt of 10%. The risk-free rate of interest on 10-year Treasury bonds is 4%. The expected return on the market portfolio is 8%. After effective taxes, Clifford Chance’s effective tax rate is 20%. Its optimal capital structure is 70% debt and 30% equity. If Clifford Chance’s beta is estimated at 1.5, what is its weighted average cost of capital? (4 marks) This firm has collected 50,000 GBP from U.K. stock and bond markets by using the weighted average cost of capital calculated in step (a). It has invested this fund on a 3-year project in U.K. and earned the cash flows of 10,000, 15,000, and 20,000 for the first, second, and third years of the project, respectively. Calculate Net Present Value of the project and provide a decision whether this project is acceptable for investment?