Fundamentals Of Corporate Finance, 9th Edition
9th Edition
ISBN: 9781260052220
Author: Richard Brealey; Stewart Myers; Alan Marcus
Publisher: McGraw-Hill Education
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Chapter 16, Problem 20QP
a.
Summary Introduction
To compute: The weighted average cost of capital.
b.
Summary Introduction
To compute: The change in market value
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A company has an expected EBIT of $18,000 in perpetuity, a tax rate of 35%, and a debt-to- equity ratio of 0.75. The interest rate on the debt is 9.5%. The firm’s WACC is 9%. a) If the company has not debt, what would be the unlevered cost of capital and firm value? b) Suppose now the company has $55,714.29 in outstanding debt. Using your answer to part a) and M&M Proposition I with taxes, what is the value of this levered firm?
(Use the following information for the next three questions). Consider a
world with taxes but no other market imperfections. BLT machinery has a debt
to equity ratio of 2/3. Its cost of equity is 20%, cost of debt is 4%, and tax rate is
35%. Assume that the risk-free rate is 4%, and market risk premium is 8%.
Suppose the firm repurchases stock and finances the repurchase with debt,
causing its debt to equity ratio to change to 3/2.
What is the firm's new cost of equity?
None of the choices
New cost of equity is 26.05%
New cost of equity is 23.59%
New cost of equity is 16.32%
New cost of equity is 28.00%
(a) What is the unlevered cost of capital? What is the (post-tax) weighted average cost of capital? [SHOW YOUR WORKING]
(b) Should the firm do the project? (Yes/No). How much firm increases in value thanks to the new project? [SHOW YOUR WORKING]
(c) What is the debt capacity for the new project in year 0? [SHOW YOUR WORKING]
Chapter 16 Solutions
Fundamentals Of Corporate Finance, 9th Edition
Ch. 16 - Prob. 1QPCh. 16 - Prob. 2QPCh. 16 - Prob. 3QPCh. 16 - Prob. 4QPCh. 16 - Prob. 5QPCh. 16 - Prob. 6QPCh. 16 - Prob. 7QPCh. 16 - Prob. 8QPCh. 16 - Prob. 9QPCh. 16 - Leverage and the Cost of Capital. Increasing...
Ch. 16 - Prob. 11QPCh. 16 - Prob. 12QPCh. 16 - Prob. 13QPCh. 16 - Prob. 14QPCh. 16 - Prob. 15QPCh. 16 - Prob. 16QPCh. 16 - Tax Shields. Establishment Industries borrows 800...Ch. 16 - Prob. 18QPCh. 16 - Prob. 19QPCh. 16 - Prob. 20QPCh. 16 - Prob. 21QPCh. 16 - Prob. 22QPCh. 16 - Prob. 23QPCh. 16 - Prob. 24QPCh. 16 - Prob. 25QPCh. 16 - Prob. 26QPCh. 16 - Prob. 27QPCh. 16 - Prob. 28QPCh. 16 - Prob. 29QPCh. 16 - Prob. 30QPCh. 16 - Prob. 31QPCh. 16 - Prob. 32QPCh. 16 - Prob. 33QPCh. 16 - Prob. 34QPCh. 16 - Prob. 35QPCh. 16 - Prob. 36QPCh. 16 - Prob. 37QP
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