
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
expand_more
expand_more
format_list_bulleted
Concept explainers
Question
The ABC Co. has 1.4 million shares of stock outstanding. The stock currently sells for $20 per
share. The firm’s debt is $4.65 million and the average cost of debt is 11 percent. The risk-free
rate is 8 percent, and the market risk premium is 7 percent. You’ve estimated that the company
has a beta of .74. If the corporate tax rate is 34 percent, what is the WACC of this Company?
Show detailed calculation
Expert Solution

This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution
Trending nowThis is a popular solution!
Step by stepSolved in 3 steps

Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Baghibenarrow_forwardSuppose you are estimating the WACC for Columbus Inc. It has the following data from its balance sheet: total debt = $200 million; total equity=$120 million. It has 20 million shares outstanding, and its stock is trading at $32 per share. Your analysis shows that the company's current borrowing rate is 7%, and that the cost of equity is 13%. If the company marginal tax rate is 30%, what is its WACC?arrow_forwardHelp me pleasearrow_forward
- Examine the following book-value balance sheet for University Products Inc. The preferred stock currently sells for $15 per share and pays a dividend of $3 a share. The common stock sells for $16 per share and has a beta of 0.6. There are 3 million common shares outstanding. The market risk premium is 10%, the risk-free rate is 6%, and the firm's tax rate is 21%. BOOK-VALUE BALANCE SHEET (Figures in $ millions) Assets Liabilities and Net Worth Cash and short-term securities $ 1.0 5.0 Bonds, coupon = 78, paid annually (maturity = 10 years, current yield to maturity = 8%) Preferred stock (par value $10 per share) $10.0 Accounts receivable 3.0 Inventories Common stock (par value $0.10) Additional paid-in stockholders' equity Retained earnings 9.0 0.3 Plant and equipment 20.0 11.7 10.0 $35.0 $35.0 Total Total a. What is the market debt-to-value ratio of the firm? b. What is University's WACC? (For all the requirements, do not round intermediate calculations. Enter your answers as a percent…arrow_forwardExamine the following book-value balance sheet for University Products Inc. The preferred stock currently sells for $15 per share and pays a dividend of $3 a share. The common stock sells for $16 per share and has a beta of 0.6. There are 3 million common shares outstanding. The market risk premium is 10%, the risk-free rate is 6%, and the firm’s tax rate is 21%. BOOK-VALUE BALANCE SHEET (Figures in $ millions) Assets Liabilities and Net Worth Cash and short-term securities $ 1.0 Bonds, coupon = 7%, paid annually(maturity = 10 years, current yield to maturity = 8%) $ 10.0 Accounts receivable 5.0 Preferred stock (par value $10 per share) 3.0 Inventories 9.0 Common stock (par value $0.10) 0.3 Plant and equipment 20.0 Additional paid-in stockholders’ equity 11.7 Retained earnings 10.0 Total $ 35.0 Total $ 35.0 a. What is the market debt-to-value ratio of the firm? b. What is University’s…arrow_forwardExamine the following book-value balance sheet for University Products Inc. The preferred stock currently sells for $15 per share and pays a dividend of $3 a share. The common stock sells for $16 per share and has a beta of 0.7. There are 1 million common shares outstanding. The market risk premium is 8%, the risk-free rate is 4%, and the firm’s tax rate is 21%. BOOK-VALUE BALANCE SHEET (Figures in $ millions) Assets Liabilities and Net Worth Cash and short-term securities $ 2.0 Bonds, coupon = 6%, paid annually(maturity = 10 years, current yield to maturity = 7%) $ 10.0 Accounts receivable 5.0 Preferred stock (par value $10 per share) 3.0 Inventories 9.0 Common stock (par value $0.10) 0.1 Plant and equipment 22.0 Additional paid-in stockholders’ equity 8.9 Retained earnings 16.0 Total $ 38.0 Total $ 38.0 a. What is the market debt-to-value ratio of the firm? b. What is University’s…arrow_forward
- Rauch Inc.’s current stock price is $2 per share and it has 300 million shares outstanding. The book value of its equity is $200 million and the book value of its debt is $400 million. Assume that the beta of the firm’s debt is 0.5 and the beta of the firm’s equity is 1.5. The risk-free rate is 3% and the expected return on the market is 9%. Assume that there are no taxes or other market imperfections. What is Rauch’s asset beta? What is Rauch’s asset cost of capital? Assume that Rauch Inc. issues an additional $100 million in debt and uses the proceeds to buy back its equity. What is Rauch’s asset beta after recapitalization? What is Rauch’s asset cost of capital after recapitalization? After the recapitalization described in part (b), Rauch’s debt beta is now 0.6. What is Rauch’s equity beta after recapitalization? What is Rauch’s cost of equity after recapitalization? From the standpoint of Rauch Inc. (i.e., the firm as a whole), what is the net present value(NPV) of the…arrow_forwardPrblmarrow_forwardSuppose that the MC Software Corporation earns a profit of $10 per share. If the prevailing interest rate is 12 percent and the stock is currently selling for $100 per share, what is the current price/earnings ratio? The higher P/E ratio, ceteris paribus: A. the more rare a stock is B. the more investors are willing to spend for a dollar of earnings C. the less debt a corporation owes D. all of the above Alejandro comes to find out that Black Adam Enterprise (BLA) had earnings per share (EPS) of $16.89 and a P/E ratio of 18.21. What would the price of the stock be for Black Adam Enterprise? Want detailed answer with explanationarrow_forward
- You want to estimate the Weighted Average Cost of Capital (WACC) for Levi Inc. The company’s tax rate is 21% and it has the equity beta of 1.24. Its debt value is $2,304 million and the equity market value is $70,080 million. The company’s interest expense is $83 million. Assume that the risk-free rate is 5% and the market return is 12%. Based on the information, compute the WACC for Leviarrow_forwardExamine the following book-value balance sheet for University Products Incorporated. The preferred stock currently sells for $15 per share and pays a dividend of $3 a share. The common stock sells for $20 per share and has a beta of 0.7. There are 2 million common shares outstanding. The market risk premium is 12%, the risk-free rate is 8%, and the firm's tax rate is 21%. BOOK-VALUE BALANCE SHEET Liabilities and Net Worth (Figures in s millions). Assets Cash and short-term securities $ 1.0 Bonds, coupon = 6%, paid annually (maturity = 10 years, current yield to maturity = 8%) $ 10.0 Accounts receivable 4.0 Preferred stock (par value $20 per share) 3.0 Inventories Plant and equipment 8.0 24.0 Common stock (par value $0.10) 0.2 Additional paid-in stockholders' equity Retained earnings 10.8 13.0 Total $ 37.0 Total $ 37.0 a. What is the market debt-to-value ratio of the firm? b. What is University's WACC? Note: For all the requirements, do not round intermediate calculations. Enter your…arrow_forwardExamine the following book - value balance sheet for University Products Incorporated. The preferred stock currently sells for $15 per share and pays a dividend of $3 a share. The common stock sells for $20 per share and has a beta of 0.7. There are 2 million common shares outstanding. The market risk premium is 12%, the risk-free rate is 8%, and the firm's tax rate is 21%. BOOK- VALUE BALANCE SHEET (Figures in $ millions) Assets Liabilities and Net Worth Cash and short- term securities $ 2.0 Bonds, coupon = 5%, paid annually (maturity = 10 years, current yield to maturity = 7% ) $ 10.0 Accounts receivable 3.0 Preferred stock (par value $20 per share) 3.0 Inventories 7.0 Common stock (par value $0.10) 0.2 Plant and equipment 25.0 Additional paid - in stockholders' equity 11.8 Retained earnings 12.0 Total $ 37.0 Total $ 37.0 What is the market debt- to-value ratio of the firm? What is University's WACC?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
- Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningCorporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education

Essentials Of Investments
Finance
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Mcgraw-hill Education,



Foundations Of Finance
Finance
ISBN:9780134897264
Author:KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:Pearson,

Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i...
Finance
ISBN:9780077861759
Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:McGraw-Hill Education