You've just done some analysis on a publicly traded company and some of your key findings are below. The company; 1. Has a WACC of 9%, and a tax rate of 25% 2. Has a Debt to Enterprise Value ratio of 60% 3. Pays no dividends and has no plans to pay dividends 4. Expects the risk-free rate to be 1% 5. The credit rating that would imply it is considered a High Yielding debt security 6. The company is in a mature industry 7. Is in a situation where if they were to raise additional capital, it would likely do so through an equity offering Given these considerations, select the most appropriate discount rate to use for this company? 4% 5% 10% 20%

You've just done some analysis on a publicly traded company and some of your key findings are below. The company; 1. Has a WACC of 9%, and a tax rate of 25% 2. Has a Debt to Enterprise Value ratio of 60% 3. Pays no dividends and has no plans to pay dividends 4. Expects the risk-free rate to be 1% 5. The credit rating that would imply it is considered a High Yielding debt security 6. The company is in a mature industry 7. Is in a situation where if they were to raise additional capital, it would likely do so through an equity offering Given these considerations, select the most appropriate discount rate to use for this company? 4% 5% 10% 20%

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter15: Capital Structure Decisions

Section: Chapter Questions

Problem 8P

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The Rivoli Company has no debt outstanding, and its financial position is given by the following data: What is Rivoli’s intrinsic value of operations (i.e., its unlevered value)? What is its intrinsic stock price? Its earnings per share? Rivoli is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 30% debt based on market values, its cost of equity, rs, will increase to 12% to reflect the increased risk. Bonds can be sold at a cost, rd, of 7%. Based on the new capital structure, what is the new weighted average cost of capital? What is the levered value of the firm? What is the amount of debt? Based on the new capital structure, what is the new stock price? What is the remaining number of shares? What is the new earnings per share?
You were hired as a consultant to Quigley Company, whose target capital structure is 35% debt, 10% preferred, and 55% common equity. The interest rate on new debt is 6.50%, the yield on the preferred is 6.00%, the cost of retained earnings is 11.25%, and the tax rate is 40%. The firm will not be issuing any new stock. What is Quigley's WACC? a. 10.11% b. 8.15% c. 9.28% d. 7.75%
There are two firms in the same business: Air Wolf and Red Wolf. Both are in the same risk class, and each has an EBIT (Earnings Before Interest & Taxes) of $10 million. Air Wolf has no debt and Red Wolf has $4 million of debt. The cost of equity is 8% and the cost of debt is 10%. Assume a tax rate of 30%. Calculate the: (a) total value of each firm and (b) the breakdown of value or capital structure in terms of its components (debt & equity).
You have the following data for your company. Market Value of Equity: $520 Book Value of Debt: $130 Required rate of return on equity: 12% Required rate of return on debt (pre-tax): 7% Corporate tax rate: 25% The company's debt is assumed to be is reasonably safe, so the book value of debt is a reasonably approximation for the market value of debt. What is the weighted average cost of capital for this company?
You were hired as a consultant to XYZ Company, whose target capital structure is 32% debt, 10% preferred, and 58% common equity. The interest rate on new debt is 8.40%, the yield on the preferred is 5.85%, the cost of common from retained earnings is 13.20%, and the tax rate is 33.00%. The firm will not be issuing any new common stock. What is XYZ's WACC?
The Rogers Company is currently in this situation: (1) EBIT = $5.7 million; (2) tax rate, T = 35%; (3) value of debt, D = $2.5 million; (4) rd = 12%; (5) rs = 14%; (6) shares of stock outstanding, n = 600,000; and stock price, P = $30. The firm’s market is stable and it expects no growth, so all earnings are paid out as dividends. The debt consists of perpetual bonds. a.Suppose the firm can increase its debt so that its capital structure has 50% debt, based on market values (it will issue debt and buy back stock). At this level of debt, its cost of equity rises to 17.5% and its interest rate on all debt will rise to 13% (it will have to call and refund the old debt). What is the WACC under this capital structure? What is the total value? How much debt will it issue, and what is the stock price after the repurchase? How many shares will remain outstanding after the repurchase?
A firm is financed with a mix of risk-free debt (currently valued at £800,000) and equity (which has a current market value of £1,200,000). The risk-free rate is 8%, the firm's cost of equity capital is 14%. What is the firm's weighted average cost of capital (to the nearest 0.01%) (i) with no taxation and (ii) if the firm's marginal tax rate is 40% and debt interest payments are tax deductible.? Select an answer and submit. For keyboard navigation, use the up/down arrok keys to select an answer. a (i) 11.60% and (ii) 10.32% b (i) 10.40% and (ii) 8.48% (i) 11.60% and (ii) 8.48% d. None of the above. (1) 10.40% and (11) 10.32% Unanswered Save
Daichi Inc. is reassessing its debt position. Its current capital structure is composed of 80% debt and 20% common equity, its beta is 1.60, and its tax rate is 35%. However, the CFO believes the company has too much debt and is considering switching to a capital structure with 40% debt and 60% equity. The risk-free rate is 4.0 percent, with a 6.0 percent market risk premium. How much does a change in capital structure affect the firm's cost of equity?
You have been tasked with the responsibility of calculating the WACC for Meeks Investments Limited and Hall Developments Limited. The risk-free rate is currently 4% and the market risk premium is 6.5%. The details for both companies are presented in the table below. The tax rate is 25%. Meeks Investments Limited Hall Developments Limited Value of Common Equity $1,500,000 $3,000,000 Beta 2.18 1.52 Value of Preferred Equity $1,000,000 $500,000 Preferred Dividends $4.50 $7.60 Price of Preferred Stock $60 $80 Price of Bonds $970 $1,160 Coupon Rate (Paid semi-annually) 8% 11% Par Value of Bonds $1,000 $1,000 Years to Maturity 8 12 Value of Debt $2,500,000 $1,500,000 Use the information in the table above to calculate the WACC for both companies.
The Rivoli Company has no debt outstanding, and its financial position is given by the following data: Expected EBIT = $600,000Growth rate in EBIT gL = 0% Cost of equity, rs = 10%Shares outstanding, n0 = 200,000 Tax rate, T (federal-plus-state) = 25% a. What is Rivoli’s intrinsic value of operations (i.e., its unlevered value)? What is its intrinsic stock price? Its earnings per share?b. . Rivoli is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 30% debt based on market values, its cost of equity , rs, will increase to 12% to reflect the increased risk. Bonds can be sold at a cost, rd, of 7%. Based on the new capital structure, what is the new weighted average cost of capital? What is the levered value of the firm? What is th amount of debt?c. Based on the new capital structure, what is the new stock price? What is the remain-ing number of shares? What is the new earnings per share?
You were hired as a consultant to XYZ Company, whose target capital structure is 35% debt, 7% preferred, and 58% common equity. The interest rate on new debt is 8.50%, the yield on the preferred is 4.20%, the cost of common from retained earnings is 16.15%, and the tax rate is 37.00%. The firm will not be issuing any new common stock. What is XYZ's WACC?Round your answer to two decimal places. For example, if your answer is $345.6671 round as 345.67 and if your answer is .05718 or 5.7182% round as 5.72. Group of answer choices 9.92% 11.77% 11.54% 13.38% 10.96%
ABC Company is re-evaluating its debt level. Its current capital structure consists of 72% debt and the remaining as common equity, its beta is 1.63, and its tax rate is 35%. However, as its CFO, you think the company has too much debt, and are considering moving to a capital structure with 36% debt and the remaining as common equity. The risk-free rate is 5.0% and the market risk premium is 6.9%. By how much would the capital structure shift change the company's cost of equity, that is, (current cost of equity - new cost of equity)? Round your final answer to two decimal places of percentage (%), but do not enter % in your answer, e.g., x.xx. (Hint: Compute the new beta using the Hamada equation first and then the new cost of equity using the CAPM.)