EBK CORPORATE FINANCE
11th Edition
ISBN: 8220102798878
Author: Ross
Publisher: YUZU
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Chapter 16, Problem 21QP
Cost of Capital Acetate, Inc., has equity with a market value of $29.5 million and debt with a market value of $8 million. Treasury bills that mature in one year yield 5 percent per year, and the expected return on the market portfolio is 11 percent. The beta of the company’s equity is 1.15. The firm pays no taxes.
- a. What is the company’s debt-equity ratio?
- b. What is the firm’s weighted average cost of capital?
- c. What is the cost of capital for an otherwise identical all-equity firm?
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Jenkins, Inc., has equity with a market value of $23.5 million and debt with a market value of $11.75 million. The cost of debt is 8 percent per year. Treasury bills that mature in one year yield 4 percent per year, and the expected return on the market portfolio over the next year is 10 percent. The beta of the company’s equity is 1.2. The firm pays no taxes. a. What is the company’s debt-equity ratio? (Do not round)
a. Debt-equity ratio
b. weighted average cost of capital
c. cost of capital
Finance, Inc. has equity with a market value of $30 million and debt with a market value of $15 million.
Treasury bills that mature in one year yield 7% per year, and the expected return on the market
portfolio over the next year is 16%. The beta of Finance Inc.'s equity is .95. The firm pays no taxes.
a) What is the firm's debt to equity ratio?
b) What is the firm's weighted average cost of capital?
c) What is the cost of capital for an otherwise identical all-equity firm?
d) Interpret your answers from part (b) and (c).
Jenkins, Inc., has equity with a market value of $23.1 million and debt with a market value
of $9.24 million. The cost of debt is 10 percent per year. Treasury bills that mature in one
year yield 6 percent per year, and the expected return on the market portfolio over the
next year is 11 percent. The beta of the company's equity is 1.16. The firm pays no taxes.
a. What is the company's debt-equity ratio? (Do not round intermediate calculations
and round your answer to 2 decimal places, e.g., 32.16.)
b. What is the company's weighted average cost of capital? (Do not round intermediate
calculations and enter your answer as a percent rounded to 2 decimal places, e.g..
32.16.)
c. What is the cost of capital for an otherwise identical all-equity firm? (Do not round
intermediate calculations and enter your answer as a percent rounded to 2 decimal
places, e.g., 32.16.)
a. Debt-equity ratio
b. Weighted average cost of capital
C.
Cost of capital
0.40
11.29%
%
Chapter 16 Solutions
EBK CORPORATE FINANCE
Ch. 16 - MM Assumptions List the three assumptions that lie...Ch. 16 - Prob. 2CQCh. 16 - Prob. 3CQCh. 16 - MM Propositions What is the quirk in the tax code...Ch. 16 - Prob. 5CQCh. 16 - Prob. 6CQCh. 16 - Optimal Capital Structure Is there an easily...Ch. 16 - Financial Leverage Why is the use of debt...Ch. 16 - Homemade Leverage What is homemade leverage?Ch. 16 - Capital Structure Goal What is the basic goal of...
Ch. 16 - Prob. 1QPCh. 16 - EBIT, Taxes, and Leverage Repeat p arts (a) and...Ch. 16 - ROE and Leverage Suppose the company in Problem 1...Ch. 16 - Break-Even EBIT Franklin Corporation is comparing...Ch. 16 - Prob. 5QPCh. 16 - Break-Even EBIT and Leverage Kolby Corp. is...Ch. 16 - Leverage and Stock Value Ignoring taxes in Problem...Ch. 16 - Homemade Leverage Star, Inc., a prominent consumer...Ch. 16 - Homemade Leverage and WACC ABC Co. and XYZ Co. are...Ch. 16 - MM Scarlett Corp. uses no debt. The weighted...Ch. 16 - Prob. 11QPCh. 16 - Calculating WACC Weston Industries has a...Ch. 16 - Prob. 13QPCh. 16 - MM and Taxes Bruce Co. expects its EBIT to be...Ch. 16 - MM and Taxes In Problem 14, what is the cost of...Ch. 16 - MM Proposition I Levered, Inc., and Unlevered,...Ch. 16 - MM Tool Manufacturing bas an expected EBIT of...Ch. 16 - Firm Value Cavo Corporation expects an EBIT of...Ch. 16 - MM Proposition I with Taxes The Dart Company is...Ch. 16 - MM Proposition I without Taxes Alpha Corporation...Ch. 16 - Cost of Capital Acetate, Inc., has equity with a...Ch. 16 - Homemade Leverage The Veblen Company and the...Ch. 16 - MM Propositions Locomotive Corporation is planning...Ch. 16 - Stock Value and Leverage Green Manufacturing,...Ch. 16 - Prob. 25QPCh. 16 - Prob. 26QPCh. 16 - Prob. 27QPCh. 16 - Prob. 28QPCh. 16 - Prob. 29QPCh. 16 - Prob. 30QPCh. 16 - STEPHENSON REAL ESTATE RECAPITALIZATION Stephenson...Ch. 16 - Prob. 2MCCh. 16 - Prob. 3MCCh. 16 - Prob. 4MCCh. 16 - Prob. 5MC
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