Estimate your firm's Weighted Average Cost of Capital. Assume that the current risk-free rate of interest is 3.6%, the market risk premium is 5.4%, and the corporate tax rate is 21%. ØDebt: . Total book value: $10 million Total market value: $18 million Coupon rate: 5% Yield to Maturity: 4% Ø Common Stock: Total book value: $12 million Total market value: $16 million Beta 1.1 ØPreferred Stock: Total book value: $1 million Total market value: $6.5 million
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- What is the company’s cost of capital? 1. CAPM = rrf + (rm – rrf)B = required rate of return on equityr rf = risk-free rate of return = 10-year Treasury rate = 3% S&P market premium (in parenthesis) is the extra return to cover risk offered in the stock market = 5%. B = Beta of company = 1.2 2. WACC = wdrd(1-t) + were = weighted average cost of capitalWeights of debt and equity: Given debt ratio, that is, debt to total assets = 28%. Cost of debt is bond rating at high end of A average = 6%. Tax rate given 40%.Assume a firm is financed with $7500 debt and $2500 equity. The beta of the equity is 1.1. The risk-free rate is 3%, and the equity premium is 6%. If the overall cost of capital of the firm is 8%, what is the beta of the firmʹs debt? Group of answer choices 0.28 0.14 0.92 0.74Use the following information to compute the weighted average cost of capital (WACC) of GoGo Inc. ▪ Debt information: The beta of GoGo Inc. stock is 1.5 . Risk-free rate is 4% • Market return is 15% • GoGo's capital structure is 65% equity and 35% debt. The tax rate is 21%. 14.62% Bonds will mature in 9 years. The maturity value is $1,000. GoGo's WACC is.. 15.47% The coupon rate is 8%, with semiannual payments. The current bond price is $1,015. 12.20% 13.32%
- Assume a firm is financed with $1000 debt that has a market beta of 0.4 and $3000 equity. The risk -free rate is 3%, the equity premium is 6%, and the firmʹs overall cost of capital is 11%. What is the expected return on the firmʹs debt? Group of answer choices 5.4% 4.5% 6.0% 3.0%Estimate your firm’s Weighted Average Cost of Capital. Assume that the current risk-free rate of interest is 3.5%, the market risk premium is 5%, and the corporate tax rate is 21%. Ø Debt: • Total book value: $10 million • Total market value: $12 million • Coupon rate: 6% • Yield to Maturity: 5% Ø Common Stock: • Total book value: $15 million • Total market value: $20 million • Beta = 1.1 Ø Preferred Stock: • Total book value: $2 million • Total market value: $2.5 million • Price per share: $20 • Dividend per share: $1.50 What is your firm’s Weighted Average Cost of Capital (input as a raw number, i.e. if your answer is 7.1%, input 7.1)?The following data refers to Company Z: - Beta = 1.7 - Required return on debt (yield to maturity on a long term bond) = 3.1% - Tax rate = 21% - 30-year government bond = 2.3% - Market risk premium can be assumed to be 5% Estimate the cost of capital (WACC) for Company Z.
- A company needs ghc1000 to finance its activities. The firm can finance this expenditure either by bonds or equity. Interest rate on bonds is 10%. The company can earn ghe 160 in good years and ghc80 in bad years. Assuming the firm faces one-quarter probability of good years; What will be the stream of returns on both bonds and equity if the company chooses the following financing options? i. a. 100% equity financing ii. 50% equity financing iii. 20% equity financing iv. 0% equity financing Estimate the equity risk associated with each option in (a) As an investor who wants to purchase a share in the company, which financing option will make you purchase the stock. Why? b. C.You are given the following information for a firm: FCF for a firm Growth Rate of FCF Asset Beta Risk Free Rate = $18.2milions 3.6% 1.5 3% 6.7% Market Risk Premium Number of Shares outstanding Using the above data, what is the price per share in dollars? 2,000,000What is the size of debt for each firm? Assume that cost of debt = 8%; unlevered cost of capital = 10%; systematic risk of the asset is 1.5
- Assume a firm can be financed with $5000 of debt that has a market beta of 0.3 and $7000 of equity that has a beta of 1.1. If the risk-free rate is 3% and the equity premium is 5%, what is the cost of capital of the overall firm? a.11.2% b. 9.9% c. 6.8% d. 8.0%A firm has a pre-tax cost of debt of 8%, a debt to capital ratio of 25%, total debt of $2,500, 25% tax rate, perpetuity growth of 5%, exit multiple of 6xYr3EBITDA, beta = 1.2, risk-free rate=4%, market risk premium = 8%, and the following cash flows: O $11,193 $12,745 O $13,492 Year O $10,732 1 EBITDA Using the year 3 exit multiple of 6 times EBITDA, determine the total enterprise value of this firm today. 2 3 1800 2200 2600 Free cash flow 500 625 840Estimating Cost of Equity Capital Assume that a company’s market beta equals 0.8, the risk-free rate is 5%, and the market return equals 8%. Compute the company’s cost of equity capital. Round answer to one decimal place (ex: 0.0245 = 2.5%) Answer%