PRIN.OF CORPORATE FINANCE >BI<
12th Edition
ISBN: 9781260431230
Author: BREALEY
Publisher: MCG CUSTOM
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Chapter 9, Problem 2PS
Summary Introduction
To compute: The cost of capital and after tax weighted average cost of capital (WACC).
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Chapter 9 Solutions
PRIN.OF CORPORATE FINANCE >BI<
Ch. 9 - (VAR.P and STDEV.P) Choose two well-known stocks...Ch. 9 - (AVERAGE, VAR.P and STDEV.P) Now calculate the...Ch. 9 - (SLOPE) Download the Standard Poors index for the...Ch. 9 - Company cost of capital Suppose a firm uses its...Ch. 9 - Prob. 2PSCh. 9 - Definitions Define the following terms: a. Cost of...Ch. 9 - Asset betas EZCUBE Corp. is 50% financed with...Ch. 9 - Prob. 6PSCh. 9 - Fudge factors John Barleycorn estimates his firms...Ch. 9 - Asset betas Which of these projects is likely to...
Ch. 9 - True/false True or false? a. The company cost of...Ch. 9 - Certainty equivalents A project has a forecasted...Ch. 9 - Company cost of capital The total market value of...Ch. 9 - Company cost of capital Nero Violins has the...Ch. 9 - Measuring risk The following table shows estimates...Ch. 9 - Company cost of capital You are given the...Ch. 9 - Measuring risk Look again at Table 9.1. This time...Ch. 9 - Prob. 16PSCh. 9 - WACC Binomial Tree Farms financing includes 5...Ch. 9 - Prob. 18PSCh. 9 - Prob. 19PSCh. 9 - Prob. 20PSCh. 9 - Certainty equivalents A project has the following...Ch. 9 - Prob. 22PSCh. 9 - Beta of costs Suppose that you are valuing a...Ch. 9 - Fudge factors An oil company executive is...
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- RECAPITALIZATION Currently, Bloom Flowers Inc. has a capital structure consisting of 20% debt and 80% equity. Blooms debt currently has an 8% yield to maturity. The risk-free rate (rRF) is 5%, and the market risk premium (rM rRF) is 6%. Using the CAPM, Bloom estimates that its cost of equity is currently 12.5%. The company has a 40% tax rate. a. What is Blooms current WACC? b. What is the current beta on Blooms common stock? c. What would Blooms beta be if the company had no debt in its capital structure? (That is, what is Blooms unlevered beta, bU?) Blooms financial staff is considering changing its capital structure to 40% debt and 60% equity. If the company went ahead with the proposed change, the yield to maturity on the companys bonds would rise to 9 5%. The proposed change will have no effect on the companys tax rate. d. What would be the companys new cost of equity if it adopted the proposed change in capital structure? e. What would be the companys new WACC if it adopted the proposed change in capital structure? f. Based on your answer to Part e, would you advise Bloom to adopt the proposed change in capital structure? Explain.arrow_forwardA company had WACC (weighted average cost of capital) equal to 8. % If the company pays off mortgage bonds with an interest rate of 4% and issues an equal amount of new stock considered to be relatively risky by the market, which of the following is true? a. residual income will increase. b. ROI will decrease. c. WACC will increase. d. WACC will decrease.arrow_forwardRECAPITALIZATION Currently, Forever flowers Inc. has a capital structure consisting of 25% debt and 75% equity. Forever's debt currently has a 7% yield to maturity. The risk-free rate (rRF) is 6%, and the market risk premium (rM - rRF) is 7%. Using the CAPM, Forever estimates that its cost of equity is currently 14.5%. The company has a 40% tax rate. a. What is Forever's current WACC? b. What is the current beta on Forever's common stock? c. What would Forever's beta be if the company had no debt in its capital structure? (That is, what is Forever's unlevered beta, bU?) Forever's financial staff is considering changing its capital structure to 40% debt and 60% equity. If the company went ahead with the proposed change, the yield to maturity on the company's bonds would rise to 10.5%. The proposed change will have no effect on the company's tax rate. d. What would be the company's new cost of equity if it adopted the proposed change in capital structure? e. What would be the company's new WACC if it adopted the proposed change in capital structure? f. Based on your answer to part e, would you advise Forever to adopt the proposed change in capital structure? Explain.arrow_forward
- Hasting Corporation is interested in acquiring Vandell Corporation. Vandell has 1 million shares outstanding and a target capital structure consisting of 30% debt; its beta is 1.4 (given its target capital structure). Vandell has $10.82 million in debt that trades at par and pays an 8% interest rate. Vandell’s free cash flow (FCFJ is $2 million per year and is expected to grow at a constant rate of 5% a year. Vandell pays a 40% combined federal and state tax rate. The risk-free rate of interest is 5%, and the market risk premium is 6%. Hasting’s First step is to estimate the current intrinsic value of Vandell. What are Vandell’s cost of equity and weighted average cost of capital? What is Vandell’s intrinsic value of operations? [Hint: Use the free cash flow corporate valuation model from Chapter 8.) What is the current intrinsic value of Vandell’s stock?arrow_forwardWACC Estimation On January 1, the total market value of the Tysseland Company was $60 million. During the year, the company plans to raise and invest $30 million in new projects. The firm’s present market value capital structure, shown here, is considered to be optimal. There is no short-term debt. New bonds will have an 8% coupon rate, and they will be sold at par. Common stock is currently selling at $30 a share. The stockholders’ required rate of return is estimated to be 12%, consisting of a dividend yield of 4% and an expected constant growth rate of 8%. (The next expected dividend is $1.20, so the dividend yield is $1.20/$30 = 4%.) The marginal tax rate is 40%. In order to maintain the present capital structure, how much of the new investment must be financed by common equity? Assuming there is sufficient cash flow for Tysseland to maintain its target capital structure without issuing additional shares of equity, what is its WACC? Suppose now that there is not enough internal cash flow and the firm must issue new shares of stock. Qualitatively speaking, what will happen to the WACC? No numbers are required to answer this question.arrow_forward
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