Domestic Problem 19-5 WACCWhispering Pines Inc. Is all-equity-financed. The expected rate of return on the company's shares is 9.75%.a. What is the opportunity cost of capital for an average-risk Whispering Pines Investment? (Enter your answer as a percent roundedto 2 decimal places.)Opportunity cost of capital%b. Suppose the company issues debt, repurchases shares, and moves to a 23% debt-to-value ratio (D/V=0.23). What will be thecompany's weighted-average cost of capital at the new capital structure? The borrowing rate is 5.25% and the tax rate is 21%. (Do notround Intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)Weighted-average cost of capital%6

The objective of the question is to calculate the opportunity cost of capital for an average-risk…

Answered: Problem 19-5 WACC Whispering Pines Inc.…

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter11: The Cost Of Capital

Section: Chapter Questions

Problem 14PROB

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RECAPITALIZATION Currently, Bloom Flowers Inc. has a capital structure consisting of 20% debt and 80% equity. Blooms debt currently has an 8% yield to maturity. The risk-free rate (rRF) is 5%, and the market risk premium (rM rRF) is 6%. Using the CAPM, Bloom estimates that its cost of equity is currently 12.5%. The company has a 40% tax rate. a. What is Blooms current WACC? b. What is the current beta on Blooms common stock? c. What would Blooms beta be if the company had no debt in its capital structure? (That is, what is Blooms unlevered beta, bU?) Blooms 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 companys bonds would rise to 9 5%. The proposed change will have no effect on the companys tax rate. d. What would be the companys new cost of equity if it adopted the proposed change in capital structure? e. What would be the companys new WACC if it adopted the proposed change in capital structure? f. Based on your answer to Part e, would you advise Bloom to adopt the proposed change in capital structure? Explain.
RECAPITALIZATION Currently, Forever flowers Inc. has a capital structure consisting of 25% debt and 75% equity. Forever's debt currently has a 7% yield to maturity. The risk-free rate (rRF) is 6%, and the market risk premium (rM - rRF) is 7%. Using the CAPM, Forever estimates that its cost of equity is currently 14.5%. The company has a 40% tax rate. a. What is Forever's current WACC? b. What is the current beta on Forever's common stock? c. 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?) 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 10.5%. The proposed change will have no effect on the company's tax rate. d. What would be the company's new cost of equity if it adopted the proposed change in capital structure? e. What would be the company's new WACC if it adopted the proposed change in capital structure? f. Based on your answer to part e, would you advise Forever to adopt the proposed change in capital structure? Explain.
Module 6 Question 2 (Individual or component costs of capital) Compute the cost of capital for the firm for the following: a. Currently bonds with a similar credit rating and maturity as the firm's outstanding debt are selling to yield 8.00 percent while the borrowing firm's corporate tax rate is 34 percent. b. Common stock for a firm that paid a $1.05 dividend last year. The dividends are expected to grow at a rate of 5.0 percent per year into the foreseeable future. The price of this stock is now $25.00. c. A bond that has a $1,000 par value and a coupon interest rate of 12.0 percent with interest paid semiannually. A new issue would sell for $1,150 per bond and mature in 20 years. The firm's tax rate is 34 percent. d. A preferred stock paying a dividend of 7.0 percent on a $100 par value. If a new issue is offered, the shares would sell for $85.00 per share. a. The after-tax cost of debt debt for the firm is ________%.
13-22 EBIT-EPS and capital structure Geniaware is considering two capital structures The key information is shown in the following table. Assume a 24% tax rate Source of capital Structure A Structure B Long-term debt €75,000 at 16% coupon rate €50,000 at 15% coupon rate Common stock 8,000 shares 10,000 shares a. Calculate the EBIT-EPS coordinates for each of the structures for EBIT values of €30,000 and €50,000 with their associated EPS values. b. Plot the two capital structures on a set of EBIT-EPS axes. c. Indicate over what EBIT range, if any, each structure is preferred. d. Discuss the leverage and risk aspects of each structure. e. If the firm is fairly certain that its EBIT will exceed €55,000, which structure would you recommend? Why? Alban
Question 2 A company is all equity financed with 18,000 shares outstanding and each share sells for $22. The company is debating of converting into a 40% debt capital structure, with 6% interest per annum. The cost of capital is currently 10%. Ignore taxes. You are required to answer the following: (a) What is the current market value of the company? (b) What is the market value of debt in the proposed debt capital structure? (c) How many shares must be repurchased in the proposed levered company? (d) What is the cost of equity in the levered company?
Table 9.1 A firm has determined its optimal capital structure which is composed of the following sources and target market value proportions. Source of Capital Long-term debt Preferred stock Common stock equity Target Market Proportions OA. 8.13 percent OB. 4.67 percent OC. 8 percent O D. 3.25 percent 20% 10 70 Debt: The firm can sell a 12-year, $1,000 par value, 7 percent bond for $960. A flotation cost of 2 percent of the face value would be required in addition to the discount of $40. Preferred Stock: The firm has determined it can issue preferred stock at $75 per share par value. The stock will pay a $10 annual dividend. The cost of issuing and selling the stock is $3 per share. Common Stock: A firm's common stock is currently selling for $18 per share. The dividend expected to be paid at the end of the coming year is $1.74. Its dividend payments have been growing at a constant rate for the last four years. Four years ago, the dividend was $1.50. It is expected that to sell, a new…
Question 1Firm A’s capital structure contains 20% debt and 80% equity. Firm B’s capital structurecontains 50% debt and 50% equity.Both firms pay 7% annual interest on their debt. Firm A’s shares have a beta of 1.0and Firm B’s beta of 1.375. The risk-free rate of interest equals 4%, and the expectedreturn on the market portfolio equals 12%. RequiredA. Calculate the WACC for each firm assuming there are no taxes.B. Recalculate the WACC figures assuming that the two firms face a marginaltax rate of 34%. What do you conclude about the impact of taxes from yourWACC calculations? C. Explain the simplifying assumptions managers make when using WACC asa project discounting method and discuss some of the common pitfallswhen using WACC in capital budgeting.
Problem 11-26 Given the following information, calculate the weighted average cost of capital for Puppet Corporation. (Round interme calculations to 2 decimal places. Round the final answers to 2 decimal places.) Percent of capital structure: Debt Preferred stock Common equity Additional information: Bond coupon rate Bond yield Bond flotation cost Dividend, expected common Price, common Dividend, preferred Flotation cost, preferred Flotation cost, common Corporate growth rate Corporate tax rate 50% % ន គ 8.5% 9.00% $1.50 $30.00 4.00% 35% a. Calculate the cost of capital assuming use of internally generated funds. Internal capital cost. % Calculate the cost of capital assuming use of externally generated funds. External capital cost c. This part of the question is not part of your Connect assignment. E
Problem 8-7 What is the weighted-average cost of capital for SKYE Corporation given the following information? Equity shares outstanding Stock price per share Yield to maturity on debt Book value of interest-bearing debt Coupon interest rate on debt Interest rate on government bonds SKYE's equity beta Historical excess return on stocks Tax rate Note: Enter your answer to 1 decimal place. Weighted-average cost of capital % 1 million $ 23 7.68% $14 million 9% 7% 0.75 5.8% 40%
QUESTION 1 a) The capital structure for the GEN-Z Berhad is provided here: Capital structure RM'000 Bond 4,000 Preferred Stock 3,000 Common Stock 13,000 The firm is in a 25% tax bracket and plans to maintain its capital structure in the future. If the firm has a 7% before-tax cost debt, a 12% cost of preferred stock, and a 16% cost of common stock, what is the firm's weighted average cost of capital (WACC)? (4 marks) b) Are preferred stocks a smart investment choice compared to common stocks? Whyor why ww w w not? (3 marks)
The following financial information relate to Lang Industrial Systems Inc. and as a financial analyst you are required to assist with the following problems: Assets Current Assets Cash Accounts Receivable Inventory Total Current Assets Fixed Assets Property, Plant, and Equipment Less Accumulated Depreciation Net Fixed Assets Total Assets Balance Sheet ($ in Millions) 2022 2021 540 820 550 950 174 776 400 Total Current Liabilities 1910 1400 Long-Term Liabilities Long-Term Debt Total Long- Term Liabilities Owners' Equity 2686 600 400 800 100 700 Liabilities and 2022 2021 Owners' Equity 2100 Current Liabilities Accounts Payable Notes Payable Common Stock ($1 Par) Retained Earnings Total Owners' Equity Total Liab. and Owners' Equity 1120 810 460 1580 431 431 340 335 675 2686 370 1180 440 440 310 170 480 2100 Income Statement ($ in Millions) 2022 Sales Cost of Goods Sold Administrative Expenses Depreciation Earnings Before Interest and Taxes Interest Expense Taxable income Taxes Net Income…
Qno2 David Ortiz Motors has a target capital structure of 40 percent debt and 60 percent equity. The yield to maturity on the company’s outstanding bonds is 9 percent, and the company’s tax rate is 40 percent. Ortiz’s CFO has calculated the company’s WACC as 9.96 percent. What is the company’s cost of equity capital?

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