a)
To determine: The WACC for Company GY.
Introduction:
WACC (Weighted Average Cost of Capital) is the rate, which a company is likely to pay to all the security holders, on an average, in order to finance its assets.
b)
To determine: The unlevered cost of capital for Company GY.
Introduction:
The unlevered cost of capital is an assessment using either an actual debt-free or hypothetical to measure a firm’s cost to implement a particular capital project. The unlevered cost of capital must demonstrate whether the project is less expensive than a levered cost of capital.
c)
To determine: The reason why the unlevered cost of capital of Company GY is less than equity cost of capital and greater than its Weighted Average Cost of Capital.
Introduction:
WACC (Weighted Average Cost of Capital) is the rate that a company is expected to pay to all the security holders, on an average, in order to finance its assets.
The unlevered cost of capital is an assessment using either an actual debt-free or hypothetical to measure a firm’s cost to implement a particular capital project. The unlevered cost of capital must demonstrate whether the project is less expensive than a levered cost of capital.
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EBK CORPORATE FINANCE
- WHICH OF THE FOLLOWING STATEMENTS IS MOST CORRECT? A. IF A FIRM'S EXPECTED BASIC EARNING POWER (BEP) IS CONSTANT FOR ALL ITS ASSETS AND EXCEES INTEREST RATE ON ITS DEBT, THEN ADDING ASSETS FINANCING THEM WITH DEBT WILL RAISE THE FIRM'S EXPECTED RATE OF RETURN ON COMMON EQUITY (ROE)? B. THE HIGHER ITS TAX RATE, THE LOWER A FIRM'S BEP RATIO WILL BE, OTHER THINGS HELD CONSTANT. C. THE HIGHER THE INTEREST RATE ON ITS DEBT, THE LOWER THE FIRM'S BEP RATIO WILL BE, OTHER THINGS HELD CONSTANT. D. THE HIGHER ITS DEBT RATIO, THE LOWER THE FIRM'S BEP RATIO WILL BE, OTHER THINGS HELD CONSTANT. E. STATEMENT A IS FALSE, BUT B, C AND D ARE ALL TRUE.arrow_forwardSuppose Alcatel-Lucent has an equity cost of capital of 10.4%, market capitalization of $11.52 billion, and an enterprise value of $16 billion. Suppose Alcatel-Lucent's debt cost of capital is 6.6% and its marginal tax rate is 34%. a. What is Alcatel-Lucent's WACC? b. If Alcatel-Lucent maintains a constant debt-equity ratio, what is the value of a project with average risk and the expected free cash flows as shown here, ? c. If Alcatel-Lucent maintains its debt-equity ratio, what is the debt capacity of the project in part (b)? a. What is Alcatel-Lucent's WACC? Alcatel-Lucent's WACC is 9.34 %. (Round to two decimal places.) Data table (Click on the following icon in order to copy its contents into a spreadsheet.) Year 1 FCF ($ million) 45 Print 0 - 100 Done 2 101 3 66 - Xarrow_forwardSuppose Alcatel-Lucent has an equity cost of capital of 9.2%, market capitalization of $10.95 billion, and an enterprise value of $15 billion. Suppose Alcatel-Lucent's debt cost of capital is 6.9% and its marginal tax rate is 38%. a. What is Alcatel-Lucent's WACC? b. If Alcatel-Lucent maintains a constant debt-equity ratio, what is the value of a project with average risk and the expected free cash flows as shown here,? c. If Alcatel-Lucent maintains its debt-equity ratio, what is the debt capacity of the project in part (b)? a. What is Alcatel-Lucent's WACC? Alcatel-Lucent's WACC is%. (Round to two decimal places.) Data table (Click on the following icon in order to copy its contents into a spreadsheet.) Year 0 1 FCF ($ million) - 100 50 Print C Done 2 99 3 66 Xarrow_forward
- The activity ratios measure which of the following? Select one: O a the efficiency of the company's supply chain O b. the efficiency with which a company generates sales from its assets Oc the profitability of the company's activities Od the production efficiency of a company's fixed assets If the assumption of financial distress costs is added, then Modigliani and Miller (with taxes) predicts that the optimal capital structure is 100% debt Select one: O True O Falsearrow_forwardWhich statement is correct?a. The cost of debt is determined by taking the present value of the interest payments and principal times one minus the tax rate.b. The difference in computing the cost of capital between using the accumulated profits and issuance of new ordinary shares is the growth rate.c. Increase in flotation costs, increase in the company’s beta and increase in the expected inflation will all lead to d. increase the company’s weighted average cost of capital.e. Increasing the company’s dividend payout would mitigate the company’s need to raise new ordinary shares.f. none of the abovearrow_forwardUnder normal circumstances, the weighted average cost of capital is used as the firm's required rate of return because a. as long as the firm's investments earn returns greater than the cost of capital, the value of the firm will increase b. it is comparable to the average of all the interest rates on debt that currently prevail in the financial markets c. returns below the cost of capital will cover all the fixed costs associated with capital and provide excess returns to the firm's stockholdersarrow_forward
- The weighted average cost of capital for a firm: O is equivalent to the after-tax cost of the firm's outstanding debt. O is a weighted average between the cost of equity and the (after-tax) cost of debt. O is unaffected when there is any change in the corporate tax rate. O remains constant when the firm's capital structure changes.arrow_forwarda) In each of the theories of capital structure the cost of equity rises as the amount of debt increases. So why don’t financial managers use as little debt as possible to keep the cost of equity down? After all, isn’t the goal of the firm to maximize share value and minimize shareholder costs?b) Country Markets has an unlevered cost of capital of 12 percent, a tax rate of 38 percent, and expected earnings before interest and taxes of $15,700. The company has $12,000 in bonds outstanding that have a 6 percent coupon and pay interest annually. The bonds are selling at par value. What is the cost of equity?arrow_forwardGive typing answer with explanation and conclusion Suppose Abraxas Corp. has an equity cost of capital of 8.2%, market capitalization of $11.37 billion, and an enterprise value of $17.12 billion. Suppose Abraxas's debt cost of capital is 5.6% and its marginal tax rate is 21%. What is Abraxas's WACC?arrow_forward
- a) In each of the theories of capital structure the cost of equity risesas the amount of debt increases. So why don’t financial managers useas little debt as possible to keep the cost of equity down? After all,isn’t the goal of the firm to maximize share value and minimizeshareholder costs?b) Country Markets has an unlevered cost of capital of 12 percent, a taxrate of 38 percent, and expected earnings before interest and taxesof $15,700. The company has $12,000 in bonds outstanding that have aISSUED BY THE CI, MGMT3048 ON JUNE 11, 2023 36 percent coupon and pay interest annually. The bonds are selling atpar value. What is the cost of equity?arrow_forwardAssume that a firm has a cost of debt capital of 0.06, a company tax rate of 0.2, a market value of debt of $10 million, a cost of equity capital of 0.14, and a market value of equity of $10 million. Also assume that the proportion of company taxes claimed by shareholders is 0.5. Which of the following values is the closest to this firm's weighted average cost of capital?arrow_forwardWhich of the following statements is CORRECT? * A company can use its retained earnings without incurring a flotation cost. As a O result, while the cost of retained earnings is not zero, it is usually less expensive than the after-tax cost of debt. The capital structure that minimizes a company's weighted average cost of capital often maximizes its stock price. The capital structure that minimizes the firm's weighted average cost of capital often maximizes its earnings per share. If everything else is stable, and corporate tax rates drops, the Modigliani-Miller tax- adjusted tradeoff principle implies that companies should expand their use of debt. When a corporation learns that the cost of debt is less than the cost of equity, rising the debt ratio would lower the WACC.arrow_forward
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