tol Processing ngHelpSave & ExitSubmitSavedPractice Problems iCheck my workEaton Electronic Company's treasurer uses both the capital asset pricing model and the dividend valuation model to compute the costof common equity (also referred to as the required rate of return for common equity).Assume:Rf =7%Km10%=1.6D1 = $ 0.70$ 198%%3DPO =nta. Compute Ki (required rate of return on common equity based on the capital asset pricing model). (Do not round intermediatecalculations. Input your answer as a percent rounded to 2 decimal places.)encesKib. Compute Ke (required rate of return on common equity based on the dividend valuation model). (Do not round intermediatecalculations, Input vour answer as a percent rounded to 2 decimal places.)< Prev10 of 10NextMcGrawHill149MacBook Air

Answered: Eaton Electronic Company's treasurer…

Eaton Electronic Company's treasurer uses both the capital asset of common equity (also referred to as the required rate of return fe Assume: Rf = Km = 7% 10%

Fundamentals Of Financial Management, Concise Edition (mindtap Course List)

10th Edition

ISBN:9781337902571

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter4: Analysis Of Financial Statements

Section: Chapter Questions

Problem 17P: CONCEPTUAL: RETURN ON EQUITY Which of the following statements is most correct? (Hint: Work Problem...

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CONCEPTUAL: RETURN ON EQUITY Which of the following statements is most correct? (Hint: Work Problem 4-16 before answering 4-17, and consider the solution setup for 4-16 as you think about 4-17.) a. If a firms expected basic earning power (BEP) is constant for all of its assets and exceeds the interest rate on its debt, adding assets and financing them with debt will raise the firms expected return on common equity (ROE). b. The higher a firms tax rate, the lower its BEP ratio, other things held constant. c. The higher the interest rate on a firms debt, the lower its BEP ratio, other things held constant. d. The higher a firms debt ratio, the lower its BEP ratio, other things held constant. e. Statement a is false, but statements b, c, and d are true.
CALCULATING 3Ms COST OF CAPITAL In this chapter, we described how to estimate a companys WACC, which is the weighted average of its costs of debt, preferred stock, and common equity. Most of the data we need to do this can be found from various data sources on the Internet. Here we walk through the steps used to calculate Minnesota Mining Manufacturings (MMM) WACC. 3. Next, we need to calculate MMMs cost of debt. We can use different approaches to estimate it. One approach is to take the companys interest expense and divide it by total debt (which is the sum of short-term debt and long-term debt). This approach only works if the historical cost of debt equals the yield to maturity in todays market (i.e., if MMMs outstanding bonds are trading at close to par). This approach may produce misleading estimates in years in which MMM issues a significant amount of new debt. For example, if a company issues a great deal of debt at the end of the year, the full amount of debt will appear on the year-end balance sheet, yet we still may not see a sharp increase in annual interest expense because the debt was outstanding for only a small portion of the entire year. When this situation occurs, the estimated cost of debt will likely understate the true cost of debt. Another approach is to try to find this number in the notes to the companys annual report by accessing the companys home page and its Investor Relations section. Alternatively, you can go to other external sources, such as bondsonline.com, for corporate bond spreads, which can be used to find estimates of the cost of debt. Remember that you need the after-tax cost of debt to calculate a firms WACC, so you will need MMMs tax rate (which has averaged around 30% in recent years). What is your estimate of MMMs after-tax cost of debt?
CALCULATING 3Ms COST OF CAPITAL In this chapter, we described how to estimate a companys WACC, which is the weighted average of its costs of debt, preferred stock, and common equity. Most of the data we need to do this can be found from various data sources on the Internet. Here we walk through the steps used to calculate Minnesota Mining Manufacturings (MMM) WACC. 1. As a first step, we need to estimate what percentage of MMMs capital comes from debt, preferred stock, and common equity. This information can be found on the firms latest annual balance sheet. (As of year end 2013, MMM had no preferred stock.) Total debt includes all interest-bearing debt and is the sum of short-term debt and long-term debt. a. Recall that the weights used in the WACC are based on the companys target capital structure. If we assume that the company wants to maintain the same mix of capital that it currently has on its balance sheet, what weights should you use to estimate the WACC for MMM? b. Find MMMs market capitalization, which is the market value of its common equity. Using the sum of its short-term debt and long-term debt from the balance sheet (we assume that the market value of its debt equals its book value) and its market capitalization, recalculate the firms debt and common equity weights to be used in the WACC equation. These weights are approximations of market-value weights. Be sure not to include accruals in the debt calculation.
USING PAST INFORMATION TO ESTIMATE REQUIRED RETURNS Use online resources to work on this chapters questions. Please note that website information changes over time, and these changes may limit your ability to answer some of these questions. Chapter 8 discussed the basic trade-off between risk and return. In the capital asset pricing model (CAPM) discussion, beta was identified as the correct measure of risk for diversified shareholders. Recall that beta measures the extent to which the returns of a given stock move with the stock market. When using the CAPM to estimate required returns, we would like to know how the stock will move with the market in the future, but because we dont have a crystal ball, we generally use historical data to estimate this relationship with beta. As mentioned in Web Appendix 8A, beta can be estimated by regressing the individual stocks returns against the returns of the overall market. As an alternative to running our own regressions, we can rely on reported betas from a variety of sources. These published sources make it easy for us to readily obtain beta estimates for most large publicly traded corporations. However, a word of caution is in order. Beta estimates can often be quite sensitive to the time period in which the data are estimated, the market index used, and the frequency of the data used. Therefore, it is not uncommon to find a wide range of beta estimates among the various Internet websites. On the summary screen, you should see an interactive chart. Typically, you can chart performance over the last 24 hours, 1 month, 6 monthsup to 5 years, or even longer. Select different time periods and watch how the graph changes. On this screen you should also see a menu to select historical prices (historical data). Some websites will not only show daily activity but also weekly or monthly activity In addition, some websites will allow you to download the data into an Excel spreadsheet.
Steeler Inc.'s CFO hired you as a consultant to help her estimate the cost of capital. You have been provided with the following data: risk-free rate (rRF) = 4.15%; market risk premium = 5.00%; and beta = 1.14. Based on the CAPM approach, what is the cost of equity from retained earnings? 9.85% 9.67% 10.60% 10.28% 10.93%
M12-15. Estimating Cost of Equity Capital Assume that a company’s market beta equals 0.6, the risk-free rate is 5%, and the market return equals 13%. Compute the company’s cost of equity capital. Round answer to one decimal place (ex: 0.0245 = 2.5%) Answer%
Identify which company’s shares you would recommend as the better investment. Provide explanations. Liquidity Panda Koala Working capital 94,100 144,750 Current ratio 2.53 2.55 Quick/acid-test ratio 1.08 1.06 Solvency Panda Koala Debt ratio 0.32 0.36 Debt-to-equity ratio 0.47 0.56 Time interest earned 23.41times 19.05times Efficiency Panda Koala Accounts (and notes) receivable turnover 20.18times 14.82times Days' sales in receivables (average collection period) 22days 27days Inventory turnover 7.70times 4.91times Days' sales in inventory 57days 82days Total asset turnover 1.83times 1.90times Profitability Panda Koala Gross profit margin 29.98 %…
Scanlon Inc.'s CFO hired you as a consultant to help her estimate the cost of capital. You have been provided with the following data: Risk free rate = 3.7%; The market risk premium is estimated to be 4%; and the company's beta = 0.7. Based on the CAPM approach, the cost of equity from retained earnings is _____ %. Show 2 decimals. E.g. 9.99%
6. Calculate and explain the Weighted Average Cost of Capital (WACC)based on the details below.a. Market Value of Equity: $7Mb. Market Value of Debt: $3Mc. Cost of equity 7%d. Cost of debt: 5%e. Tax Rate: 32 (use .32 for calculation)
Archimedes Levers is financed by a mixture of debt and equity. You have the followinginformation about its cost of capital:rE =__, rD = 12%, rA = __,Beta(E) = 1.5, Beta(D) =__, Beta(A) = __,rf = 10%, rm = 18%, D/V = .5Can you fill in the blanks?
If the profit margin is 0.2158, asset turnover is 0.5389 and financial leverage is 1.2047, what is the return on equity? Multiple Choice 0.1163 0.1401 0.6492 0.5389
(part A is correct, I just need help with B, C, D, and E) A. Calculate the Weights for debt, common equity, and preferred equity. (round final answers to 4 decimal places) Debt: 0.4 (correct) Preferred Equity: 0.04 (correct) Common Equity: 0.56 (correct) B. Calculate the cost of debt % C. Calculate the cost of preferred equity % D. calculate the cost of common equity % E. What is the firms weighted average cost of capital (WACC)%