CORPORATE FINANCE - LL+CONNECT ACCESS
12th Edition
ISBN: 9781264054961
Author: Ross
Publisher: MCG
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Chapter 13, Problem 9QAP
Summary Introduction
Adequate information:
Common stock outstanding
Book value per share
Current price per share
Book
Coupon rate of Bond I
Face value of Bond I
Selling rate of Bond I
Price of Bond I
Term duration of Bond I
Number of compounding periods in a year
Book value of Bond II
Coupon rate of Bond II
Face value of Bond II
Selling rate of Bond II
Price of Bond II
Term duration of Bond II
Number of compounding periods in a year
Beta of the stock
Risk-free rate
Market risk premium
Tax rate
To compute: WACC for company F.
Introduction: The Weighted average cost of capital (WACC) refers to the cost of capital from various sources such as common stocks, preferred stocks, bonds, etc.
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You have the following information on a company on which to base your calculations and discussion:
Cost of equity capital (rE) = 18.55%
Cost of debt (rD) = 7.85%
Expected market premium (rM –rF) = 8.35%
Risk-free rate (rF) = 5.95%
Inflation = 0%
Corporate tax rate (TC) = 35%
Current long-term and target debt-equity ratio (D:E) = 2:5
a. What are the equity beta (bE) and debt beta (bD) of the firm described above?[Hint: Assume that the above costs of capital have been generated by an appropriate equilibrium model.]
b. What is the weighted-average cost of capital (WACC) for this firm at the current debt-equity ratio?
c. What would the company’s cost of equity capital become if you unlevered the capital structure (i.e. reduced gearing until there is no debt)
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.
Consider a two-date binomial model. A company has both debt and equity in its capital structure. The value of the company is 100 at Date 0. At Date 1, it is equally like that the value of the company increases by 20% or decreases by 10%. The total promised amount to the debtholders is 100 at Date 1. The riskfree interest rate is 10%.
a. What is the value of the debt at Date 0? What is the value of the equity at Date 0?
b. Suppose the government announces that it guarantees the company’s payment to the debtholders. How much is the government guarantee worth?
Chapter 13 Solutions
CORPORATE FINANCE - LL+CONNECT ACCESS
Ch. 13 - Project Risk If you can borrow all the money you...Ch. 13 - WACC and Taxes Why do we use an aftertax figure...Ch. 13 - SML Cost or Equity Estimation If you use the stock...Ch. 13 - SML Cost or Equity Estimation What are the...Ch. 13 - Prob. 5CQCh. 13 - Cost of Capital Suppose Tom OBedlam, president of...Ch. 13 - Company Risk versus Project Risk Both Dow Chemical...Ch. 13 - Prob. 8CQCh. 13 - Leverage Consider a levered firms projects that...Ch. 13 - Beta What factors determine the beta of a stock?...
Ch. 13 - Prob. 1QAPCh. 13 - Prob. 2QAPCh. 13 - Prob. 3QAPCh. 13 - Prob. 4QAPCh. 13 - Prob. 5QAPCh. 13 - Prob. 6QAPCh. 13 - Prob. 7QAPCh. 13 - Prob. 8QAPCh. 13 - Prob. 9QAPCh. 13 - Prob. 10QAPCh. 13 - Prob. 11QAPCh. 13 - Prob. 12QAPCh. 13 - Prob. 13QAPCh. 13 - Prob. 14QAPCh. 13 - Prob. 15QAPCh. 13 - Prob. 16QAPCh. 13 - Prob. 17QAPCh. 13 - Prob. 18QAPCh. 13 - Prob. 19QAPCh. 13 - Prob. 20QAPCh. 13 - Prob. 21QAPCh. 13 - Prob. 22QAPCh. 13 - Prob. 23QAPCh. 13 - Prob. 24QAPCh. 13 - Prob. 1MCCh. 13 - Prob. 2MCCh. 13 - Go to www.reuters.com and find the list of...Ch. 13 - You now need to calculate the cost of debt for...Ch. 13 - You now have all the necessary information to...Ch. 13 - You used Tesla as a representative company to...
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