Q: fill in the rest of the following table:
A: As the portfolio is to be as risky as the market, the beta of portfolio will be 1. As the risk free…
Q: What is the effective annualized rate compounded quarterly that is equivalent to 12.000% per annum…
A: We need to use effective annual rate (EAR) formula to calculate effective annualized rate compounded…
Q: Martinez Industries had the following operating results for 2021: Sales = $33,914; Cost of goods…
A: Operating cash flows can be determined by using the net income approach where net income can be…
Q: Consider a student loan of $10,000 at a fixed APR of 10% for 5 years. a. Calculate the monthly…
A: Here,LoanAmount (PV) is $10,000Interest Rate (r) is 10%Time Period of Loan (n) is 5 yearsCompounding…
Q: Duo Corporation is evaluating a project with the following cash flows: Year Cash Flow 0 −$ 15,200 1…
A: MIRR refers to the modified IRR which is more appropriate when there are series of cash flows with a…
Q: Required information [The following information applies to the questions displayed below] A pension…
A: The Sharpe ratio is one of the important tools that aid in analyzing the financial portfolio's…
Q: Analysts' estimates on expected returns from equity investments are based on several factors. These…
A: An expected return is the quantum of financial gain or loss an investor expects from their…
Q: 8) At what interest rate should $15,000 be deposited to have $50,000 available within 5 years?…
A: Compound = Semiannually = 2Present Value = pv = $15,000Future Value = fv = $50,000Time = t = 5 * 2 =…
Q: Abigail Grace has a $900,000 fully diversified portfolio. She subsequently inherits ABC Company…
A: The expected return of the portfolio refers to the projected income that the individual can earn by…
Q: Lifecycle Motorcycle Company is expected to pay a dividend in year 1 of $2, a dividend in year 2 of…
A: Terminal value is calculated as follows:-Terminal value = whereD = dividend paidg = growth rater =…
Q: A retirement plan provides its enrollees with two options. Option 1 provides participants with…
A: A discount factor is a monetary concept that is used to calculate the present value of cash flows or…
Q: P4-6 Calculating Internal Growth [LO3] The most recent financial statements for Bello Company are…
A: The internal growth rate represents the rate of growth achieved by a firm without obtaining external…
Q: Firm U is an all equity firm and has a market value of $100,000 and EBIT of $300,000. Firm L has…
A: In finance and investment, the term "homemade leverage" means the practice of using one's own…
Q: A stock just paid an annual dividend of $2.2. The dividend is expected to grow by 10% per year for…
A: The value of the stock is positively related with the growth rate and negative related with the cost…
Q: ack inherited a perpetuity-due, with annual payments of 10,000. He immediately exchanged the first…
A: PV=PMT/InterestWhere PV = Present valuePMT=Annual payments of $10,000Interest=Effective interest…
Q: Wyatt Oil pays a regular dividend of $2.0 per share. Typically, the stock price drops by $2.20 per…
A: When the company receives profits and distributes them among the shareholders. That share of profit…
Q: You are a consultant to a firm evaluating an expansion of its current business. The cash-flow…
A: NPV means Net present value.It is a capital budgeting technique used for making investment…
Q: A stock just paid a dividend of $1.86. Going forward, dividends will be paid annually and grow at a…
A: In this example we can use dividend discounting model of constant growth to find out the fair price…
Q: A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a…
A: The portfolio is a combination of different securities. These securities include stocks, bonds, and…
Q: Tony Ring wants to attend Northeast College. He will need $50,000 6 years from today. Assume Tony's…
A: We need to use compound interest formula below to calculate principal deposit today to get desired…
Q: Bond J has a coupon of 4 percent. Bond K has a coupon of 8 percent. Both bonds have 10 years to…
A:
Q: You will receive 23 annual payments of $20,500. The first payment will be received 5 years from…
A: Number of Payment = n = 23Annual Payment = p = $20,500Time = t = 5 -1 = 4Interest Rate = r = 4.9%
Q: QUESTION 2 Use the average daily method to find the finance charge on the credit card account for…
A: Financial charges refer to the fees, interest, or costs associated with borrowing money, using…
Q: If average daily remittances are $4 million, and "extended disbursement float" adds 8 days to the…
A: Company wants to reduces cash outflow and increase cash inflow because cash money can be invested…
Q: b. Cost of equity c. Cost of equity d-1. WACC d-2. WACC 9.76 % 12.15 X % % %
A: We can determine the cost of equity using the formula below:Then we can determine the WACC using the…
Q: The correlation coefficients between several pairs of stocks are as follows: Corr(A, B) = .85;…
A: The expected return rate of the portfolio can be found by adding up each stock's return after…
Q: Esquire Company needs to acquire a molding machine to be used in its manufacturing process. Two…
A: Present value refers to the current date value or the discounted value of the cash flow at an…
Q: Assuming that you have contributed to your TFSA account, the maximum amount from 2014 to 2022 (all…
A: We can determine the FV of each deposit using the formula below:Where n = year in which the cash…
Q: Equivalent annual cost $
A: Net present value is determined by deducting the current value of cash flows from the initial…
Q: You sell a product in the US market that is manufactured in Morocco. It costs you 500 Moroccan…
A: Variables in the question:Cost of production per item=500 Moroccan DirhamShipping cost=$3 per…
Q: what is the present value of this liability?
A: Present value illustrates the current value of a sum of money that will be received or paid in the…
Q: Give me 2 examples of time value of money (TVM) equations with answers. show your work below.
A: The Time Value of Money (TVM) is a financial concept that acknowledges the idea that the value of…
Q: Problem 8.13 (CAPM, Portfolio Risk, and Return) Consider the following information for stucks A, B,…
A: a.A mixture of different kinds of funds and securities for the investment is termed as the…
Q: Dog Up! Franks is looking at a new sausage system with an installed cost of $690,000. This cost will…
A: Net benefits from investment proposals can be found by using the NPV function in the Excel sheet for…
Q: Mobray Corp is experiencing rapid growth. Dividends are expected to grow at a rate of 20% for the…
A: Current dividend = $3Growth rate = 20% for 3 years and 5% from thereonRequired return = 10%
Q: Midland Oil has $1,000 par value bonds outstanding at 16 percent interest. The bonds will mature in…
A: Price of the bond is the PV of all future coupons and par value discounted at the YTM. n = time…
Q: MLK Bank has an asset portfolio that consists of $100 million of 30-year, 10 percent annual coupon,…
A: Bond:A bond is a debt instrument issued by the corporation for the purpose of raising capital. Such…
Q: You are considering purchasing stock in a company that is expected to pay a $ 2.63 dividend later…
A: The dividend discount model will be used here. As per the dividend discount model the value of a…
Q: You Invest $3000 by buying 100 shares of Driss Inc at a price of $30 per share. One year from now,…
A: IRR is the break-even rate of return at which the present value of cash flow is equal to the initial…
Q: Cost-Cutting Proposals Tanaka Machine Shop is considering a four-year project to improve its…
A: NPV is also known as Net Present Value. It is a capital budgeting technique which helps in decision…
Q: Earnings per common share of ABC Industries for the next year are expected to be $3.2 and to grow 8%…
A: The dividend discount model or Gordan's Model will be used here. As per the dividend discount model…
Q: What is the value of a put option if the underlying stock price is $44, the strike price is $37, the…
A: Put options gives the right but not the obligation to sell at the strike price. Using Black Scholes…
Q: Required: The market price of a security is $56. Its expected rate of return is 12%. The risk-free…
A: Current market price of security=$56Expected rate of return =12%.Risk-free rate = 5%Market risk…
Q: $80 million in debt to $125 million. The interest rate on debt is 9% and is not expected to change.…
A: Earnings before interest and taxes (EBIT):EBIT, which stands for Earnings Before Interest and…
Q: An enterprise needs to make the following annuity payments into a private pension fund: £1100 paid…
A: The payment are made at the beginning of the each year. Therefore, there is an annuity due. The…
Q: return. What is the maximum level of risk aversion for which the risky portfolio is still preferred…
A: Calculate the maximum rate of aversion rate We will use following formula to calculate utility of…
Q: You are looking at investing in undeveloped land that you expect might be worth $2138713 in 9 years.…
A: We need to use present value formula to calculate current price of undeveloped land.WherePV =Present…
Q: 02% 3% 04% Ⓒ5% för par value has three years until it matures and has a 4% coupon rate. Assuming…
A: Current yield is an important return metric associated with bonds. Current yield is the rate of…
Q: Alphabet (GOOGL) has yet to pay a dividend, but in spring 2018 it announced it would repurchase $8.5…
A: Share repurchase refers to the corporate action that a company undertakes when it believes that the…
Q: Blue Jazz, Inc., has 5.4 percent coupon bonds on the market that have 20 years left to maturity. The…
A: Bonds are fixed-income securities that represent a loan made by an investor to a borrower. They are…
Assume that shares could be repurchased at the current market price of $25 per share. Calculate CD’s expected EPS and TIE at debt levels of $0, $250,000, $500,000, $750,000, and $1,000,000. How many shares would remain after recapitalization under each scenario?
Sales (last year) $1,100,000
Variable costs as a % of sales 60%
Fixed costs $40,000
Total capital $2,000,000
Shares outstanding 80,000
Current stock price $25
BVPS $25
Tax rate 25%
rRF 7.50%
RPM 6.00%
βu 1.25
WACC = rs
WHAT IS THE WACC=rs?
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 2 images
- Hasting Corporation is interested in acquiring Vandell Corporation. Vandell has 1 million shares outstanding and a target capital structure consisting of 30% debt; its beta is 1.4 (given its target capital structure). Vandell has $10.82 million in debt that trades at par and pays an 8% interest rate. Vandell’s free cash flow (FCFJ is $2 million per year and is expected to grow at a constant rate of 5% a year. Vandell pays a 40% combined federal and state tax rate. The risk-free rate of interest is 5%, and the market risk premium is 6%. Hasting’s First step is to estimate the current intrinsic value of Vandell. What are Vandell’s cost of equity and weighted average cost of capital? What is Vandell’s intrinsic value of operations? [Hint: Use the free cash flow corporate valuation model from Chapter 8.) What is the current intrinsic value of Vandell’s stock?Hasting Corporation is interested in acquiring Vandell Corporation. Vandell has 1.5 million shares outstanding and a target capital structure consisting of 30% debt; its beta is 1.4 (given its target capital structure). Vandell has $10.19 million in debt that trades at par and pays an 8% interest rate. Vandell’s current free cash flow (FCF0) is $2 million per year and is expected to grow at a constant rate of 5% a year. Vandell pays a 25% combined federal-plus-state tax rate, the same rate paid by Hastings. The risk-free rate of interest is 5%, and the market risk premium is 6%. Hasting’s first step is to estimate the current intrinsic value of Vandell. What is Vandell’s cost of equity? What is its weighted average cost of capital? What is Vandell’s intrinsic value of operations? (Hint: Use the free cash flow corporate valuation model from Chapter 7.) Based on this analysis, what is the minimum stock price that Vandell’s shareholders should accept?CALCULATING THE WACC Here is the condensed 2019 balance sheet for Skye Computer Company (in thousands of dollars): Skyes earnings per share last year were 3.20. The common stock sells for 55.00. last years dividend (D0) was 2.10, and a flotation cost of 10% would be required to sell new common stock. Security analysts are projecting that the common dividend will grow at an annual rate of 9%. Skyes preferred stock pays a dividend of 3.30 per share, and its preferred stock sells for 30.00 per share. The firms before-lax cost of debt is 10%, and its marginal tax rate is 25%. The firms currently outstanding 10% annual coupon rate, long-term debt sells at par value. The market risk premium is 5%, the risk-free rate is 6%, and Skyes beta is 1.516. The firms total debt, which is the sum of the companys short-term debt and long-term debt, equals 1.2 million. a. Calculate the cost of each capital component, that is, the after-tax cost of debt, the cost of preferred stock, the cost of equity from retained earnings, and the cost of newly issued common stock. Use the DCF method to find the cost of common equity. b. Now calculate the cost of common equity from retained earnings, using the CAPM method. c. What is the cost of new common stock based on the CAPM? (Hint: Find the difference between r1 and rs as determined by the DCF method, and add that differential to the CAPM value for rs.) d. If Skye continues to use the same market-value capital structure, what is the firms WACC assuming that (1) it uses only retained earnings for equity and (2) if it expands so rapidly that it must issue new common stock?
- WACC Estimation On January 1, the total market value of the Tysseland Company was $60 million. During the year, the company plans to raise and invest $30 million in new projects. The firm’s present market value capital structure, shown here, is considered to be optimal. There is no short-term debt. New bonds will have an 8% coupon rate, and they will be sold at par. Common stock is currently selling at $30 a share. The stockholders’ required rate of return is estimated to be 12%, consisting of a dividend yield of 4% and an expected constant growth rate of 8%. (The next expected dividend is $1.20, so the dividend yield is $1.20/$30 = 4%.) The marginal tax rate is 40%. In order to maintain the present capital structure, how much of the new investment must be financed by common equity? Assuming there is sufficient cash flow for Tysseland to maintain its target capital structure without issuing additional shares of equity, what is its WACC? Suppose now that there is not enough internal cash flow and the firm must issue new shares of stock. Qualitatively speaking, what will happen to the WACC? No numbers are required to answer this question.Capital Structure Analysis Pettit Printing Company has a total market value of 100 million, consisting of 1 million shares selling for 50 per share and 50 million of 10% perpetual bonds now selling at par. The companys EBIT is 13.24 million, and its tax rate is 15%. Pettit can change its capital structure by either increasing its debt to 70% (based on market values) or decreasing it to 30%. If it decides to increase its use of leverage, it must call its old bonds and issue new ones with a 12% coupon. If it decides to decrease its leverage, it will call its old bonds and replace them with new 8% coupon bonds. The company will sell or repurchase stock at the new equilibrium price to complete the capital structure change. The firm pays out all earnings as dividends; hence, its stock is a zero-growth stock. Its current cost of equity, rs, is 14%. If it increases leverage, rs will be 16%. If it decreases leverage, rs will be 13%. What is the firms WACC and total corporate value under each capital structure?Suppose IWT has decided to distribute $50 million, which it presently is holding in liquid short-term investments. IWT’s value of operations is estimated to be about $1,937.5 million; it has $387.5 million in debt and zero preferred stock. As mentioned previously, IWT has 100 million shares of stock outstanding. Assume that IWT has not yet made the distribution. What is IWT’s intrinsic value of equity? What is its intrinsic stock price per share? Now suppose that IWT has just made the $50 million distribution in the form of dividends. What is IWT’s intrinsic value of equity? What is its intrinsic stock price per share? Suppose instead that IWT has just made the $50 million distribution in the form of a stock repurchase. Now what is IWT’s intrinsic value of equity? How many shares did IWT repurchase? How many shares remained outstanding after the repurchase? What is its intrinsic stock price per share after the repurchase?