a. b. C- 1. C- 2. C- 3. d. If the company were financed entirely by equity, how much would it be worth? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89) What is the required return on the firm's levered equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Use the weighted average cost of capital method to calculate the value of the company. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89) What is the value of the company's equity? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89) What is the value of the company's debt? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89) Use the flow to equity method to calculate the value of the company's equity. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89)
a. b. C- 1. C- 2. C- 3. d. If the company were financed entirely by equity, how much would it be worth? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89) What is the required return on the firm's levered equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Use the weighted average cost of capital method to calculate the value of the company. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89) What is the value of the company's equity? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89) What is the value of the company's debt? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89) Use the flow to equity method to calculate the value of the company's equity. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89)
Chapter15: Dividend Policy
Section: Chapter Questions
Problem 13P
Related questions
Concept explainers
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
Question
Transcribed Image Text:Bluegrass Mint Company has a debt-equity ratio of .30. The required return on the company's unlevered equity is 12
percent and the pretax cost of the firm's debt is 5.8 percent. Sales revenue for the company is expected to remain
stable indefinitely at last year's level of $18,900,000. Variable costs amount to 70 percent of sales. The tax rate is 23
percent and the company distributes all its earnings as dividends at the end of each year.
a.
b.
C-
1.
C-
un
What is the value of the company's equity? (Do not round intermediate calculations and enter your answer in
2. dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89)
C-
u
3.
If the company were financed entirely by equity, how much would it be worth? (Do not round intermediate
calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g.,
1,234,567.89)
d.
What is the required return on the firm's levered equity? (Do not round intermediate calculations and enter your
answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Use the weighted average cost of capital method to calculate the value of the company. (Do not round
intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places,
e.g., 1,234,567.89)
What is the value of the company's debt? (Do not round intermediate calculations and enter your answer in
dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89)
Use the flow to equity method to calculate the value of the company's equity. (Do not round intermediate
calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g.,
1,234,567.89)
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