Financial Reporting, Financial Statement Analysis and Valuation
8th Edition
ISBN: 9781285190907
Author: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Videos
Question
Chapter 12, Problem 12PC
a.
To determine
Compute the unlevered market equity beta.
b.
To determine
Compute the
c.
To determine
Compute the revised weighted-average cost of capital.
d.
To determine
Compute the
e.
To determine
Explain whether sufficient cash flow will be generated each year to service the interest on the debt.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Using Capital Asset Pricing Method (CAPM), compute for the cost of capital (equity) with risk-free rate of 4%, market return of 8% and Beta of 1.75
a. 13.00%
b. 12.00%
c. 11.00%
d. 10.00%
1. Using capital asset pricing model, compute for the cost of equity with risk-free rate of 4%, market return on 8%, beta of 1.5 and tax rate of 30%.
2. With risk-free rate of 5%, beta of 1.5, market return of 8%, prevailing credit spread (rate applied on debt on top of risk-free rate) of 3%, tax rate of 30% and equity ratio of 30%, compute for the weighted average cost of capital.
3. The appropriate WACC of a company is 8%. With risk-free rate of 4%, market return of 10%, prevailing credit spread of 2%, tax rate of 30% and equity ratio of 40%, compute the beta.
4. Explain what the Capital Asset Pricing Model (CAPM) is and calculate
and explain the result of the CAPM based on the following data.
a. Expected Return: 8%
b. Risk-free rate: 4%
c. Beta of the investment: 1.2
ER=Rf+B(ERm - Rf)
where:
ER = expected return of investment
Rf risk-free rate
B;= beta of the investment
-
(ERm - Rf) = market risk premium
Chapter 12 Solutions
Financial Reporting, Financial Statement Analysis and Valuation
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
- 1. Using the Capital Asset Pricing Model (CAPM), what's this company's cost of common equity? ·Expected market return = 10% Risk-free rate = 4% Beta = 1.3arrow_forwardUse the following forecasted financials: (See pictures. Certain cells were left blank on prupose) b) Use the CAPM model to derive the cost of equity capital. Assume beta equals 1.09, the risk-free rate is 1.62%, and the market risk premium is 4.72%. a)Calculate residual income for 2021 and 2022. c) Calculate the present value of residual income for 2024 and 2025.arrow_forwardCapital Asset Pricing Model (CAPM) - Based on Market Risk Premium Risk free rate (Rf)* 3.00% Beta (B)* Market risk premium* Expected return (ER) 1.50 10.00%arrow_forward
- Calculate the firm's expected return using the capital asset pricing model: Risk Free Rate: 3% Market Return: 7% Beta: 0.85 Standard Deviation: 4% Debt: Equity Ratio: 60%arrow_forwardAssume that the Collins Company has a beta of 1.8 and that the risk-free rate of return is 2.5 percent. If the equity-risk premium is six percent, calculate the cost of equity for the Collins Company using the capital asset pricing model.arrow_forwardCapital Asset Pricing Model (CAPM) - Beta Risk free rate (Rf)* 3.00% Beta (B)* Market risk premium* 8.00% Expected return (ER) 9.40%arrow_forward
- The following data refers to Company Z: - Beta = 1.7 - Required return on debt (yield to maturity on a long term bond) = 3.1% - Tax rate = 21% - 30-year government bond = 2.3% - Market risk premium can be assumed to be 5% Estimate the cost of capital (WACC) for Company Z.arrow_forwardYou have the following initial information on which to base your calculations and discussion: Debt yield = 2.5% Required Rate of Return on Equity = 13% Expected return on S&P500 = 8% Risk-free rate (rF) = 1.5% Inflation = 2.5% Corporate tax rate (TC) = 30% Current long-term and target debt-equity ratio (D:E) = 1:3 a. What is the unlevered cost of equity (rE*) for this firm? Assume that the management of the firm is considering a leveraged buyout of the above company. They believe that they can gear the company to a higher level due to their ability to extract efficiencies from the firm’s operations. Thus, they wish to use a target debt-equity ratio of 3:1 in their valuation calculations. b. What would the levered cost of equity equal for this firm at a debt-equity ratio (D:E) of 3:1? c. What would the required rate of return for the company equal if it were to be acquired under the leveraged buyout structure (i.e., what would the estimated firm WACC equal to under a…arrow_forwardYou have the following initial information on which to base your calculations and discussion: Debt yield = 2.5% Required Rate of Return on Equity = 13% Expected return on S&P500 = 8% Risk-free rate (rF) = 1.5% Inflation = 2.5% Corporate tax rate (TC) = 30% Current long-term and target debt-equity ratio (D:E) = 1:3 a. What is the unlevered cost of equity (rE*) for this firm? Assume that the management of the firm is considering a leveraged buyout of the above company. They believe that they can gear the company to a higher level due to their ability to extract efficiencies from the firm’s operations. Thus, they wish to use a target debt-equity ratio of 3:1 in their valuation calculations.arrow_forward
- You need to estimate the equity cost of capital for XYZ Corp. You have the following data available regarding past returns: a. What was XYZ's average historical return? b. Compute the market's and XYZ's excess returns for each year. Estimate XYZ's beta. c. Estimate XYZ's historical alpha. d. Suppose the current risk-free rate is 3%, and you expect the market's return to be 9%. Use the CAPM to estimate an expected return for XYZ Corp.'s stock. e. Would you base your estimate of XYZ's equity cost of capital on your answer in part (a) or in part (d)? Data table (Click on the following icon in order to copy its contents into a spreadsheet.) Year 2007 2008 Risk-free Return 2% 1% Print Market Return 5% - 39% Done XYZ Return 11% - 46% Xarrow_forwardCapital Asset Pricing Model (CAPM) - Risk Free rate Risk free rate (Rf)* Beta (B)* 1.10 Market risk premium* 7.00% Expected return (ER) 10.20%arrow_forwardAs per Capital Asset Pricing Model (CAPM) : Re=Rf+(Rm-Rf)βwhere, Re= Required rate of returnRf= Risk free rate of return = 0%Rm = Market return or Expected return on market = 3.3%β = Beta of the stock = 1.24Now, Re= Rf + Rm - Rf βRe= 0 + 3.3 - 0 ×1.24Re= 4.092% To calculate the abnormal return we will use the formula: = E(R) - Re= 3% - 4.092% = -1.092% or - 0.01092 How did you get the 4.092%?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Financial Reporting, Financial Statement Analysis...FinanceISBN:9781285190907Author:James M. Wahlen, Stephen P. Baginski, Mark BradshawPublisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Financial Reporting, Financial Statement Analysis...
Finance
ISBN:9781285190907
Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Financial leverage explained; Author: The Finance story teller;https://www.youtube.com/watch?v=GESzfA9odgE;License: Standard YouTube License, CC-BY