EBK CORPORATE FINANCE
4th Edition
ISBN: 9780134202785
Author: DeMarzo
Publisher: VST
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Chapter 31, Problem 7P
Summary Introduction
To determine: The after-tax cost of debt in yen.
Introduction: Cost of capital is the cost of a company’s fund that refers to the
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Thunderhorse Oil. Thunderhorse Oil is a U.S. oil company. Its current cost of debt is 7.4%, and the 10-year U.S. Treasury yield, the proxy for the risk-free rate of interest, is 3.9%. The expected return on the market portfolio is 8.1%. The company's effective tax rate is 38%. Its optimal capital structure is 55% debt and 45% equity. a. If Thunderhorse's beta is estimated at 1.6, what is Thunderhorse's weighted average cost of capital? b. If Thunderhorse's beta is estimated at 1.1 , significantly lower because of the continuing profit prospects in the global energy sector, what is Thunderhorse's weighted average cost of capital?
Thunderhorse Oil. Thunderhorse Oil is a U.S. oil company. Its current cost of debt is 6.70%, and the 10-year U.S. Treasury yield, the proxy for
the risk-free rate of interest, is 3.30%. The expected return on the market portfolio is 8.60%. The company's effective tax rate is 39%. Its optimal
capital structure is 40% debt and 60% equity.
a. If Thunderhorse's beta is estimated at 1.70, what is Thunderhorse's weighted average cost of capital?
b. If Thunderhorse's beta is estimated at 1.30, significantly lower because of the continuing profit prospects in the global energy sector, what
is Thunderhorse's weighted average cost of capital?
Blue Cod, Inc., a private firm in the holiday gift industry, is considering a new project. The company currently has a target debt-equity ratio of .35, but the industry target debt-equity ratio is .30.
The industry average beta is 1.50. The market risk premium is 8 percent, and the risk-free rate is 6 percent. Assume all companies in this industry can issue debt at the risk-free rate. The corporate
tax rate is 40 percent. The project requires an initial outlay of $690,000 and is expected to result in an after-tax EBIT of $110,000 at the end of the first year. The project will be financed at the
company's target debt-equity ratio. Annual cash flows from the project will grow at a constant rate of 7 percent until the end of the fifth year and remain constant forever thereafter. What is the
NPV of this project? (Keep at least 3 decimal places in intermediate steps. Choose an answer that is closest to yours)
$263,770.1
$211,264.8
$291,028.5
$237,186.1
Chapter 31 Solutions
EBK CORPORATE FINANCE
Ch. 31.1 - Prob. 1CCCh. 31.1 - What implication do internationally integrated...Ch. 31.2 - Prob. 1CCCh. 31.2 - When do these two methods give the same NPV of the...Ch. 31.3 - Prob. 1CCCh. 31.3 - Prob. 2CCCh. 31.4 - Prob. 1CCCh. 31.4 - Prob. 2CCCh. 31.5 - What conditions cause the cash flows of a foreign...Ch. 31.5 - Prob. 2CC
Ch. 31 - You are a U.S. investor who is trying to calculate...Ch. 31 - Mia Caruso Enterprises, a U.S. manufacturer of...Ch. 31 - Etemadi Amalgamated, a U.S. manufacturing firm, is...Ch. 31 - Prob. 4PCh. 31 - You work for a U.S. firm, and your boss has asked...Ch. 31 - Prob. 6PCh. 31 - Prob. 7PCh. 31 - Prob. 8PCh. 31 - Prob. 9PCh. 31 - Prob. 10PCh. 31 - Prob. 11PCh. 31 - Prob. 12PCh. 31 - Assume that in the original Ityesi example in...
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What is WACC-Weighted average cost of capital; Author: Learn to invest;https://www.youtube.com/watch?v=0inqw9cCJnM;License: Standard YouTube License, CC-BY