CORPORATE FINANCE CUSTOM W/CONNECT >BI
11th Edition
ISBN: 9781307036633
Author: Ross
Publisher: MCG/CREATE
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Chapter 18, Problem 18QP
Summary Introduction
To determine: The NPV of the Project.
Introduction:
A flow to equity (FTE) measure of profit that will be designated to investors by another organization other than the issuing organization, similar to a LLC. An Adjusted Present Value (APV) is the
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Stephens Electronics is considering a change in its target capital structure, which currently consists of 25% debt and 75% equity. The CFO believes the firm should use more debt, but the CEO is reluctant to increase the debt ratio. The risk-free rate, rRFrRF, is 5.0%, the market risk premium, RPM, is 6.0%, and the firm s tax rate is 40%. Currently, the cost of equity, rsrs, is 11.5% as determined by the CAPM. What would be the estimated cost of equity if the firm used 60% debt?
Strathclyde Inc., a private biotechnology company, is currently estimating their required rate of return for raising debt and equity financing and has obtained the following information:
Government bonds currently carries an interest rate of 4.25%
Considering the riskiness of the industry, the estimated credit spread of biotechnology companies averages at around 3.5% to 4.5%
Strathclyde Inc., as a mature biotech company is the least risky company within the industry
Equity market during these challenging times of crisis demands a 3.25% premium compared to government securities
Considering how returns of Strathclyde Inc. compares to the overall equity market returns, the estimated beta is at negative 0.5
38. How much is the equity risk premium for Strathclyde Inc.?
Answer should be with 2 decimal points without the percentage sign (e.g., 3.00). Don't forget to indicate whether your answer is positive or negative.
Serendipity Inc. is re-evaluating its debt level. Its current capital structure consists of 80% debt and 20% common equity, its beta is 1.60, and its tax rate is 25%. However, the CFO thinks the company has too much debt, and he is considering moving to a capital structure with 40% debt and 60% equity. The risk-free rate is 5.0% and the market risk premium is 6.0%. By how much would the capital structure shift change the firm's cost of equity?
a. −5.40%
b. −7.99%
c. −6.00%
d. −7.26%
e. −6.60%
Chapter 18 Solutions
CORPORATE FINANCE CUSTOM W/CONNECT >BI
Ch. 18 - APV How is the APV of a project calculated?Ch. 18 - WACC and APV What is the main difference between...Ch. 18 - FTE What is the main difference between the FTE...Ch. 18 - Prob. 4CQCh. 18 - Prob. 5CQCh. 18 - NPV and APV Zoso is a rental car company that is...Ch. 18 - APV Gemini, Inc., an all-equity firm, is...Ch. 18 - Prob. 3QPCh. 18 - Prob. 4QPCh. 18 - Prob. 5QP
Ch. 18 - Prob. 6QPCh. 18 - Prob. 7QPCh. 18 - WACC National Electric Company (NEC) is...Ch. 18 - WACC Bolero, Inc., has compiled the following...Ch. 18 - Prob. 10QPCh. 18 - Prob. 11QPCh. 18 - APV MVP, Inc., has produced rodeo supplies for...Ch. 18 - Prob. 13QPCh. 18 - Prob. 14QPCh. 18 - Prob. 15QPCh. 18 - Prob. 16QPCh. 18 - Prob. 17QPCh. 18 - Prob. 18QPCh. 18 - Prob. 1MC
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