Corporate Finance Plus MyLab Finance with Pearson eText -- Access Card Package (4th Edition) (Berk, DeMarzo & Harford, The Corporate Finance Series)
4th Edition
ISBN: 9780134408897
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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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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Hallmark, the greeting card company, is considering going online. It is anticipated that it will cost the firm RM 1 billion to do so and that the firm will be able to use its current debt capacity to borrow 20% of this investment, at an after-tax cost of 4.5%. Hallmark has a beta of 1.1. Online retailers have a beta of 1.50 and do not carry debt. If the riskless rate is 6% and the market risk premium is 5.5% estimate the cost of capital
for the online investment.
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?
Chapter 31 Solutions
Corporate Finance Plus MyLab Finance with Pearson eText -- Access Card Package (4th Edition) (Berk, DeMarzo & Harford, The Corporate Finance Series)
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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- Thunderhorse Oil. Thunderhorse Oil is a U.S. oil company. Its current cost of debt is 7.20%, and the 10-year U.S. Treasury yield, the proxy for the risk-free rate of interest, is 3.10%. The expected return on the market portfolio is 8.30%. The company's effective tax rate is 38%. Its optimal capital structure is 70% debt and 30% equity. a. If Thunderhorse's beta is estimated at 1.30, what is Thunderhorse's weighted average cost of capital? b. If Thunderhorse's beta is estimated at 1.00, significantly lower because of the continuing profit prospects in the global energy sector, what is Thunderhorse's weighted average cost of capital? a. If Thunderhorse's beta is estimated at 1.30, what is Thunderhorse's weighted average cost of capital? % (Round to two decimal places.)arrow_forwardRoo-Fus Inc is considering financing its international expansions by borrowing in the international debt markets. The current annualized 30-day LIBOR rate is 4.4%. Roo-Fus Inc expects that the next period's 30-day LIBOR is 9.6%. Roo-Fus Inc's credit rating implies that it will face a 1.4% premium over LIBOR. What are Roo-Fus Ine's (annualized) borrowing costs? a. This period: 5.8%. Next period: 11.0% b. This period: 5.8%. Next period: 5.8% c. This period: 11.0%. Next period: 11.0% d. This period: 4.4%. Next period: 9.6% e. This period: 4.4%. Next period: 4.4%arrow_forwardWalsall Albion Co. currently has a debt-to-equity ratio of 0.35 and a total market value of €200 million. the company believes that increasing leverage (by taking on debt and repurchasing an equal euro amount of shares) will increase firm value; consequently, they have set a target debt-to-equity ratio of 0.6, which they plan to maintain permanently. If the marginal tax rate is 30%, then present value of the tax shield it will create?arrow_forward
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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