You work in the finance department of Brom, Inc. The firm currently has adebt-to-asset ratio of 35%. The firm's outstanding debt is a single bond issue.These securities have a face value of $1,000, mature in 14 years, bear 5%(annual) coupons, and are currently trading at 95.205% of par. The firm'scurrent beta is 0.65. It faces the statutory 21% marginal tax rate. The currentreturn on T-Bonds is 4% and the long-term market risk premium is 7%,therefore the firm's cost of equity financing is 8.55%.If Brom, Inc. does change its debt-to-asset ratio to 50%, what will be the firm'scost of equity financing according to the the simple-version of the Hamadaformula? (Round your answer to two decimal places, e.g. 6.75)

The Weighted Average Cost of Capital (WACC) is a blended interest rate that a company uses to…

Answered: You work in the finance department of…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter12: The Cost Of Capital

Section: Chapter Questions

Problem 11P

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Suppose the Schoof Company has this book value balance sheet: The notes payable are to banks, and the interest rate on this debt is 10%, the same as the rate on new bank loans. These bank loans are not used for seasonal financing but instead are part of the companys permanent capital structure. The long-term debt consists of 30,000 bonds, each with a par value of 1,000, an annual coupon interest rate of 6%, and a 20-year maturity. The going rate of interest on new long-term debt, rd, is 10%, and this is the present yield to maturity on the bonds. The common stock sells at a price of 60 per share. Calculate the firms market value capital structure.
Granite Works maintains a debt-equity ratio of .65 and has a tax rate of 32%. The pretax cost of debt is 9.8%. There are 25,000 shares of stock outstanding with a beta of 1.2 and a market price of $19 a share. The current market risk premium is 8.5% and the current risk-free rate is 3.6%. This year, the firm paid an annual dividend of $1.10 a share and expects to increase that amount by 2% each year. Using an average expected cost of equity, what is the WACC?
NU Inc. has 80 semi-annual bonds outstanding that are selling at $1,033 each. The coupon rate is 3%. The maturity is 25 years. The firm has 5,000 shares of common stock outstanding at a market price of $20 a share. The stock has a beta of 1.4. The U.S. T-bill is yielding 4 percent. The market risk premium is 8 percent. If the tax rate is 21 percent, what is the weighted average cost of capital, assuming all interest is tax deductible
A&P Inc., the grocery store chain, has 6 million shares of common stock outstanding which currently trade for $40 per share. The company also has 150,000 bonds each with a face value of $1,000 and annual coupons of $50. The bonds have 6 years to maturity and the next coupon is due in one year. The yield on the bonds is 5%. The company's beta is 1.05, the risk-free rate is 3%, and the expected return on the market is 8%. The tax rate is 35%. What is A&P's WACC? Express your answer in percentage form rounded to two decimal places. WACC = ?%
If Smolinski, Incorporated, were an all-equity company, it would have a beta of.95. The company has a target debt - equity ratio of .50. The expected return on the market portfolio is 12 percent and Treasury bills currently yield 3.1 percent. The company has one bond issue outstanding that matures in 25 years, a par value of $1,000, and a coupon rate of 6 percent. The bond currently sells for $ 1,050. The corporate tax rate is 23 percent. a. What is the company's cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g ., 32.16.) b. What is the company's cost of equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c. What is the company' s weighted average cost of capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e. g., 32.16.)
The Ashford Twins hired you as a consultant to estimate the company's WACC. You have obtained the following information. (1) The company's noncallable bonds mature in 20 years, have a coupon rate of 8.00% paid annually, a par value of $1,000, and a current market price of $950. (2) The company's tax rate is 21%. (3) The required rate of return on the company's common stock based on CAPM is 9.5%. (4) The target capital structure consists of 40% debt, with the remainder comprised of common equity. What is its WACC? (Ch. 10) Group of answer choices 7.56% 7.84% 6.42% 9.11% 8.40%
If Wild Widgets, Inc., were an all-equity company, it would have a beta of .90. The company has a target debt-equity ratio of .60. The expected return on the market portfolio is 11 percent and Treasury bills currently yield 3.3 percent. The company has one bond issue outstanding that matures in 26 years, a par value of $2,000, and a coupon rate of 6 percent. The bond currently sells for $2,130. The corporate tax rate is 24 percent. a. What is the company’s cost of debt? What is the company’s cost of equity? What is the company’s weighted average cost of capital?
Pastel Interiors is currently an all-equity firm that has an annual projected BIT of $136,900. The current cost of equity is 16.5% and the tax rate is 20%. The firm is considering adding $118,000 of debt with a coupon rate of 7.5% to its capital structure. The debt will be sold at par value. What is the value of the unlevered firm (pre-debt)? A $763,570 B $663.758 C $730,133 (D) $696,945 ) $630,570
Assume that you are on the financial staff of Vanderheiden Inc., and you have collected the following data: The yield on the company’s outstanding bonds is 8.0%, its tax rate is 35%, the next expected dividend is $0.80 a share, the dividend is expected to grow at a constant rate of 7.00% a year, the price of the stock is $17.50 per share, the flotation cost for selling new shares is F = 8%, and the target capital structure is 30% debt and 70% common equity. What is the firm's WACC, assuming it must issue new stock to finance its capital budget?
A company currently has a bond outstanding that pays 6% coupon rate (coupons paid semiannually), a $1,000 par value and matures in 30 years. The bond is currently trading at $515.16. The company's tax rate is 25%. What is the firm's after-tax component cost of debt for purposes of calculating the weighted average cost of capital ("WACC")? Please show formulas, step by step instructions (without a financial calculator or Excel)
Gateway Services' CFO is interested in estimating the company's WACC. Eight years ago, the company issued a 30-year bond with a 7.5 percent annual coupon rate, payable semi-annually. The bonds have a face value of $1,000 per unit and currently sell for $1,105. The company’s common stock has a beta of 1.8, the risk-free rate is 2.5 percent, and the expected return on the market is 8.0 percent. Gateway’s tax rate is 25 percent and its target capital structure consists of 70 percent common equity and 30 percent debt. What is the company’s WACC?
An analyst has collected the following information regarding Christopher Co.: · The company's capital structure is 70 percent equity, 30 percent debt. · The yield to maturity on the company's bonds is 5 percent. · The company's year-end dividend (D1) is forecasted to be $0.8 a share. · The company expects that its dividend will grow at a constant rate of 5 percent a year. · The company's stock price is $25. · The company's tax rate is 40 percent. · The company anticipates that it will need to raise new common stock this year. Its investment bankers anticipate that the total flotation cost will equal 10 percent of the amount issued. Assume the company accounts for flotation costs by adjusting the cost of capital. Given this information, calculate the company's cost of new equity. Round it to two decimal places.

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