International Financial Management
14th Edition
ISBN: 9780357130698
Author: Madura
Publisher: Cengage
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Jaguar Holdings Company can obtain debt funding at 8 percent. Its marginal income tax rate is 25 percent. The yield on US Treasury securities is 3 percent. The market risk premium is 6.0 percent, and the firm’s beta is 2. It has a targeted debt-to-equity ratio of 1:1 (25 percent debt, 75 percent equity).
What is its weighted average cost of capital?
Thunderhorse Oil is a U.S. oil company. Its current cost of debt is 7.40%, and the 10-year U.S. Treasury yield, the proxy for the risk-free rate of interest, is 3.50%. The expected return on the market portfolio is 8.20%. The company's effective tax rate is 30%. Its optimal capital structure is 55% debt and 45% equity.
a. If Thunderhorse's beta is estimated at 1.80, what is Thunderhorse's weighted average cost of capital?
b. If Thunderhorse's beta is estimated at 1.50 , significantly lower because of the continuing profit prospects in the global energy sector, what is Thunderhorse's weighted average cost of capital?
BHP Billiton, An Australian company's stock, has a beta of 0.80. The expected return on the market is 12 per cent, and Treasury
bills are yielding 3,40 per cent. Further, the company has a debt issue outstanding with 15 years to maturity that is quoted at
65 per cent of face value. The issue makes semiannual payments and has an embedded cost of 6 per cent annually, It
considers a debt-equity ratio of 0.80 and a 25 per cent corporate tax rate. In this year, the company has an EBIT of $3.15
million. Depreciation, the increase in net working capital, and capital spending were $265,000, $105,000, and $495,000,
respectively. You expect that over the next five years, EBIT will grow at 15 per cent per year, depreciation and capital spending
will grow at 20 per cent per year, and NW will grow at 10 per cent per year, It also has $19.5 million in debt and 400,000
shares outstanding, After Year-5, the adjusted cash flow from assets is expected to grow at 3.50 per cent indefinitely,
Answer the…
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- Bob-Bye, Inc. has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The WACC is to be measured by using the following weights:: 40% long term debt, 10% preferred stock, and 50% common stock equity (retained earnings,new common stock or both). The firm’s tax is 30%. Debt: The firm can sell for P980, a 10-year, P1,000 par value bond paying annual interest at 13% coupon rate. A flotation cost of 3% of the par value is required in addition to the discount of P20 per bond. Preferred Stock: 8 percent (annual divided) preferred stock having a par value of P100 can be sold for P65. An additional fee of P2 per share must be paid to the underwriters. Common Stock: The firm’s common stock is currently selling for P50 per share. The dividend expected to be paid at the end of the coming year is P4 per share.. Its dividend payments which have been approximately 60% of earnings per share in each of the past 5…arrow_forwardWelltodo Ltd has the following capital structure, which it considers to be optimal: debt = 15%, preferred stock = 20%, and common stock = 65%. FCI’s tax rate is 40%, and investors expect earnings and dividends to grow at a constant rate of 6% in the future. Welltodo paid a dividend of Gh₵4.70 per share last year (D0), and its stock currently sells at a price of Gh₵60 per share. Ten-year Treasury bonds yield 6%, the market risk premium is 5%, and Welltodo’s beta is 1.3. The following terms would apply to new security offerings. Preferred: New preferred could be sold to the public at a price of Gh₵100 per share, with a dividend of Gh₵9. Flotation costs of Gh₵5 per share would be incurred. Debt: Debt could be sold at an interest rate of 9%. Common: New common equity will be raised only by retaining earnings.Determine the company’s WACCarrow_forwardShoobee, Inc. has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average of capital. The WACC it to be measured by using the following weights: 50% long term, 10% preferred stock, and 40% common stock equity (retained earnings, new common stock issuance, or both). The firm tax is 25%. Debt: The firm can sell for P980, a 10-year, P1,000 par value bond paying annual interest at 13% coupon rate. A flotation cost of 3% of the par value is required in addition to the discount of P20 per bond. Preferred stock: 8 percent (annual dividend) preferred stock having a par value of P100 can be sold for P65. An additional fee of P2.00 per share must be paid to the underwriters. Common stock: The firm’s common stock is currently selling for P50 per share. The recent dividend paid was P4.00 per share. Its dividend payments which have approximately 60% of earnings per share in each past 6 years follows: Year Dividend 2021 P4.00 2020 3.75…arrow_forward
- Clifford Chance is a large U.K. firm with the before tax cost of debt of 10%. The risk-free rate of interest on 10-year Treasury bonds is 4%. The expected return on the market portfolio is 8%. After effective taxes, Clifford Chance’s effective tax rate is 20%. Its optimal capital structure is 70% debt and 30% equity. If Clifford Chance’s beta is estimated at 1.5, what is its weighted average cost of capital? (4 marks) This firm has collected 50,000 GBP from U.K. stock and bond markets by using the weighted average cost of capital calculated in step (a). It has invested this fund on a 3-year project in U.K. and earned the cash flows of 10,000, 15,000, and 20,000 for the first, second, and third years of the project, respectively. Calculate Net Present Value of the project and provide a decision whether this project is acceptable for investment?arrow_forwardRollins Corporation is estimating its WACC. Its target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Rollins' beta is 1.8 , the risk-free rate is 4 percent, and the market risk premium is 5 percent. Rollins is a constant-growth firm which just paid a dividend of $2.00, sells for $31 per share, and has a growth rate of 6 percent. The firm's policy is to use a risk premium of 4 percentage points when using the bond-yield-plus-risk-premium method to find rs. The firm's marginal tax rate is 34 percent.What is Rollins cost of equity when using the DCF approach? Express your answer in percentage (without the % sign) and round it to two decimal places.arrow_forwardSainsbury is financed by both debt and equity. Using the following information and calculate the weighted average cost of capital (WACC) of Sainsbury. (HINT)the average of recent yearly returns of FTSE100 as proxy of UK market is 7.5%; UK corporate tax rate is 19%). Debt 748,000 Equity 6,604,000 Risk free rate 1.971% Beta 0.27 Current Debt 258,000 Total liabilities and stockholders' equity 25,162,000arrow_forward
- BHP Billiton, An Australian company’s stock, has a beta of 0.90. The expected return on the market is 10.50 per cent, and Treasury bills are yielding 3.40 per cent. Further, the company has a debt issue outstanding with 23 years to maturity that is quoted at 120 per cent of face value. The issue makes semiannual payments and has an embedded cost of 6 per cent annually. It considers a debt-equity ratio of 0.60 and a 22 per cent corporate tax rate. In this year, the company has an EBIT of $3.15 million. Depreciation, the increase in net working capital, and capital spending were $265,000, $105,000, and $495,000, respectively. You expect that over the next five years, EBIT will grow at 15 per cent per year, depreciation and capital spending will grow at 20 per cent per year, and NWC will grow at 10 per cent per year. It also has $19.5 million in debt and 400,000 shares outstanding. After Year-5, the adjusted cash flow from assets is expected to grow at 3.50 per cent indefinitely. What…arrow_forwardBHP Billiton, An Australian company's stock, has a beta of 0.90. The expected return on the market is 10.50 per cent, and Treasury bills are yielding 3.40 per cent. Further, the company has a debt issue outstanding with 23 years to maturity that is quoted at 120 per cent of face value. The issue makes semiannual payments and has an embedded cost of 6 per cent annually. It considers a debt-equity ratio of 0.60 and a 22 per cent corporate tax rate. In this year, the company has an EBIT of $3.15 million. Depreciation, the increase in net working capital, and capital spending were $265,000, $105,000, and $495,000, respectively. You expect that over the next five years, EBIT will grow at 15 per cent per year, depreciation and capital spending will grow at 20 per cent per year, and NWC will grow at 10 per cent per year. It also has $19.5 million in debt and 400,000 shares outstanding. After Year-5, the adjusted cash flow from assets is expected to grow at 3.50 per cent indefinitely. Answer…arrow_forwardBHP Billiton, An Australian company's stock, has a beta of 0.90. The expected return on the market is 10.50 per cent, and Treasury bills are yielding 3.40 per cent. Further, the company has a debt issue outstanding with 23 years to maturity that is quoted at 120 per cent of face value. The issue makes semiannual payments and has an embedded cost of 6 per cent annually. It considers a debt-equity ratio of 0.60 and a 22 per cent corporate tax rate. In this year, the company has an EBIT of $3.15 million. Depreciation, the increase in net working capital, and capital spending were $265,000, $105,000, and $495,000, respectively. You expect that over the next five years, EBIT will grow at 15 per cent per year, depreciation and capital spending will grow at 20 per cent per year, and NWC will grow at 10 per cent per year. It also has $19.5 million in debt and 400,000 shares outstanding. After Year-5, the adjusted cash flow from assets is expected to grow at 3.50 per cent indefinitely. Answer…arrow_forward
- SIROM Scientific Solutions has $10 million of outstanding equity and $5 million of bank debt. The bank debt costs 5% per year. The estimated equity beta is 2. If the market risk premium is 9% and the risk-free rate is 3%, compute the weighted average cost of capital if the firm's tax rate is 30%.arrow_forwardCompany XYZ is funded with $500 million equity and $475 million debt. The yield on bonds issued by XYZ is 7.85%. Its beta is 1.15 and the tax rate is 40%. The risk-free rate is 5% with the market risk premium 9%. The weighted average cost of capital for this firm is 10.17% 11.02% 12.02% 12.85% 13.60%arrow_forwardPare Food is interested in calculating its weighted average cost of capital (WACC). The company’s CFO has collected the following information: The target capital structure consists of 40 percent debt and 60 percent common stock. The company has 20-year noncallable bonds with a par value of $1,000, a 9 percent annual coupon, and is now selling 92 1/4. Equity flotation costs are 2 percent. The company’s common stock has a beta of 0.8. The risk-free rate is 5 percent. The market risk premium is 4 percent. The company’s tax rate is 40 percent. Compute WACCarrow_forward
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