The conclusion on the cost of equity . Introduction: The cost of equity refers to the return that the equity shareholders expect on an equity capital.

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Answer 1

Question

Chapter 12, Problem 8CTCR

a)

Summary Introduction

To discuss: The conclusion on the cost of equity.

Introduction:

The cost of equity refers to the return that the equity shareholders expect on an equity capital.

b)

Summary Introduction

To discuss: The conclusion on the cost of debt.

Introduction:

The cost of debt refers to the return that the bondholders or lenders expect on their principal. In other words, it refers to the borrowing costs of the company.

c)

Summary Introduction

To discuss: The conclusion on the comparison of cost of debt and cost of equity.

Introduction:

The cost of equity refers to the return that the equity shareholders expect on an equity capital. The cost of debt refers to the return that the bondholders or lenders expect on their principal. In other words, it refers to the borrowing costs of the company.

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Suppose Jack, president of Heart Limited has hired you to advise on the firm’s cost of capital. The company paid $1 million of dividends in the past year. Its market capitalization was$10 million. Based on his own analysis, Jack suggests that the company increases its useof equity financing, because “debt costs 12.5 percent, but equity only costs 10 percent;thus, equity is cheaper.” Appraise Jack’s statement.

The firm is financed with debt and equity. The book value of the debt is $10,000,000; the book value of the equity is $30,000,000. The stockholders require an 10.1% return. If the required return on the firm’s debt is 4% and the firm’s tax rate is 20%, what is the firm’s weighted average cost of capital (WACC)?

A firm is expected to have free cash flow of $4 million next year, after that it will grow at 5% forever. The equity cost of capital of the firm is 12% while the weighted average cost of capital is 10%. The firm has $1 million cash, $6 million debt, and 5 million shares of stock. (a) What should be the enterprise value of the firm? (b) What should be the stock price per share?

Answer 2

Question

Chapter 12, Problem 8CTCR

a)

Summary Introduction

To discuss: The conclusion on the cost of equity.

Introduction:

The cost of equity refers to the return that the equity shareholders expect on an equity capital.

b)

Summary Introduction

To discuss: The conclusion on the cost of debt.

Introduction:

The cost of debt refers to the return that the bondholders or lenders expect on their principal. In other words, it refers to the borrowing costs of the company.

c)

Summary Introduction

To discuss: The conclusion on the comparison of cost of debt and cost of equity.

Introduction:

The cost of equity refers to the return that the equity shareholders expect on an equity capital. The cost of debt refers to the return that the bondholders or lenders expect on their principal. In other words, it refers to the borrowing costs of the company.

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Answer 3

Question

Chapter 12, Problem 8CTCR

a)

Summary Introduction

To discuss: The conclusion on the cost of equity.

Introduction:

The cost of equity refers to the return that the equity shareholders expect on an equity capital.

b)

Summary Introduction

To discuss: The conclusion on the cost of debt.

Introduction:

The cost of debt refers to the return that the bondholders or lenders expect on their principal. In other words, it refers to the borrowing costs of the company.

c)

Summary Introduction

To discuss: The conclusion on the comparison of cost of debt and cost of equity.

Introduction:

The cost of equity refers to the return that the equity shareholders expect on an equity capital. The cost of debt refers to the return that the bondholders or lenders expect on their principal. In other words, it refers to the borrowing costs of the company.

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Answer 4

Question

Chapter 12, Problem 8CTCR

a)

Summary Introduction

To discuss: The conclusion on the cost of equity.

Introduction:

The cost of equity refers to the return that the equity shareholders expect on an equity capital.

b)

Summary Introduction

To discuss: The conclusion on the cost of debt.

Introduction:

The cost of debt refers to the return that the bondholders or lenders expect on their principal. In other words, it refers to the borrowing costs of the company.

c)

Summary Introduction

To discuss: The conclusion on the comparison of cost of debt and cost of equity.

Introduction:

The cost of equity refers to the return that the equity shareholders expect on an equity capital. The cost of debt refers to the return that the bondholders or lenders expect on their principal. In other words, it refers to the borrowing costs of the company.

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Answer 5

Chapter 12, Problem 8CTCR

a)

Summary Introduction

To discuss: The conclusion on the cost of equity.

Introduction:

The cost of equity refers to the return that the equity shareholders expect on an equity capital.

b)

Summary Introduction

To discuss: The conclusion on the cost of debt.

Introduction:

The cost of debt refers to the return that the bondholders or lenders expect on their principal. In other words, it refers to the borrowing costs of the company.

c)

Summary Introduction

To discuss: The conclusion on the comparison of cost of debt and cost of equity.

Introduction:

The cost of equity refers to the return that the equity shareholders expect on an equity capital. The cost of debt refers to the return that the bondholders or lenders expect on their principal. In other words, it refers to the borrowing costs of the company.

Answer 6

Chapter 12, Problem 8CTCR

a)

Summary Introduction

To discuss: The conclusion on the cost of equity.

Introduction:

The cost of equity refers to the return that the equity shareholders expect on an equity capital.

Answer 7

Chapter 12, Problem 8CTCR

a)

Summary Introduction

To discuss: The conclusion on the cost of equity.

Introduction:

The cost of equity refers to the return that the equity shareholders expect on an equity capital.

Answer 8

b)

Summary Introduction

To discuss: The conclusion on the cost of debt.

Introduction:

The cost of debt refers to the return that the bondholders or lenders expect on their principal. In other words, it refers to the borrowing costs of the company.

Answer 9

b)

Summary Introduction

To discuss: The conclusion on the cost of debt.

Introduction:

The cost of debt refers to the return that the bondholders or lenders expect on their principal. In other words, it refers to the borrowing costs of the company.

Answer 10

c)

Summary Introduction

To discuss: The conclusion on the comparison of cost of debt and cost of equity.

Introduction:

The cost of equity refers to the return that the equity shareholders expect on an equity capital. The cost of debt refers to the return that the bondholders or lenders expect on their principal. In other words, it refers to the borrowing costs of the company.

Answer 11

c)

Summary Introduction

To discuss: The conclusion on the comparison of cost of debt and cost of equity.

Introduction:

The cost of equity refers to the return that the equity shareholders expect on an equity capital. The cost of debt refers to the return that the bondholders or lenders expect on their principal. In other words, it refers to the borrowing costs of the company.

Answer 12

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Answer 13

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Answer 14

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Answer 15

Ch. 12.1 - What is the primary determinant of the cost of...Ch. 12.1 - What is the relationship between the required...Ch. 12.2 - Prob. 12.2ACQ Ch. 12.2 - Prob. 12.2BCQ Ch. 12.3 - Prob. 12.3ACQ Ch. 12.3 - Prob. 12.3BCQ Ch. 12.3 - Prob. 12.3CCQ Ch. 12.4 - Prob. 12.4ACQ Ch. 12.4 - Why do we multiply the cost of debt by (1 TC)...Ch. 12.4 - Under what conditions is it correct to use the...

The conclusion on the cost of equity . Introduction: The cost of equity refers to the return that the equity shareholders expect on an equity capital.

Solution Summary: The author explains how Person TB concludes that the cost of equity does not depend on its coupon rate. The yield to maturity of the bond reflects the market's expectations.

Concept explainers

Videos

To discuss: The conclusion on the cost of equity.

Introduction:

The cost of equity refers to the return that the equity shareholders expect on an equity capital.

To discuss: The conclusion on the cost of debt.

Introduction:

The cost of debt refers to the return that the bondholders or lenders expect on their principal. In other words, it refers to the borrowing costs of the company.

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Chapter 12 Solutions

The conclusion on the cost of equity . Introduction: The cost of equity refers to the return that the equity shareholders expect on an equity capital.

Solution Summary: The author explains how Person TB concludes that the cost of equity does not depend on its coupon rate. The yield to maturity of the bond reflects the market's expectations.

Concept explainers

Videos

To discuss: The conclusion on the cost of equity. Introduction: The cost of equity refers to the return that the equity shareholders expect on an equity capital.

To discuss: The conclusion on the cost of debt. Introduction: The cost of debt refers to the return that the bondholders or lenders expect on their principal. In other words, it refers to the borrowing costs of the company.

Want to see the full answer?

Chapter 12 Solutions

To discuss: The conclusion on the cost of equity.

Introduction:

The cost of equity refers to the return that the equity shareholders expect on an equity capital.

To discuss: The conclusion on the cost of debt.

Introduction:

The cost of debt refers to the return that the bondholders or lenders expect on their principal. In other words, it refers to the borrowing costs of the company.