Star Plc is a coffee machines producer. The Star's Plc common stock has a beta of 0.8. The Treasury bill rate is currently 1%, and the market risk premium is estimated at 8%. The book and market values of company's equity are 9,000,000$ (book) and 12,000,000$ (market) respectively. Star's Plc debt amounts to 5,000,000$. The interest rate on debt is 6%. Assume that market value of debt is equal to its book value. The corporation tax rate is 30%. a. What is the company's weighted average cost of capital (WACC)? b. Star Plc is looking into undertaking a new project which has an internal rate of return of 12% and has similar characteristics to the projects currently undertaken by company, should the company accept the project? Briefly justify your answers c. How would your answer to the part b) change if the potential project has a risk that is significantly different from the risk of the projects currently undertaken by the company? Briefly explain.

Star Plc is a coffee machines producer. The Star's Plc common stock has a beta of 0.8. The Treasury bill rate is currently 1%, and the market risk premium is estimated at 8%. The book and market values of company's equity are 9,000,000$ (book) and 12,000,000$ (market) respectively. Star's Plc debt amounts to 5,000,000$. The interest rate on debt is 6%. Assume that market value of debt is equal to its book value. The corporation tax rate is 30%. a. What is the company's weighted average cost of capital (WACC)? b. Star Plc is looking into undertaking a new project which has an internal rate of return of 12% and has similar characteristics to the projects currently undertaken by company, should the company accept the project? Briefly justify your answers c. How would your answer to the part b) change if the potential project has a risk that is significantly different from the risk of the projects currently undertaken by the company? Briefly explain.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Hexaware Systems Limited uses the market value weights of Debt and Equity for its WACC computation. The firm has issued 1 million bonds and the bonds are currently trading at $255 each. The debt issued by the firm carries AAA rating. The credit spread is 150 basis points of 10-year treasury yield. The 10-year treasury is currently yielding 5.2%. Th firm has 20 million shares outstanding with a current market price of $410 each. The return from DJIA for the period is 12% and the beta of Hexaware is 1.3.
The common stock of Buildwell Conservation & Construction Inc. (BCCI) has a beta of 0.9. The Treasury bill rate is 4%, and the market risk premium is estimated at 10%. BCCI’s capital structure is 25% debt, paying an interest rate of 8%, and 75% equity. The debt sells at par. Buildwell pays tax at 21%. What is BCCI’s cost of equity capital? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Note; Dont use excel. Show manual calculations.
The common stock of Buildwell Conservation & Construction Inc. (BCCI) has a beta of 0.9. The Treasury bill rate is 4%, and the market risk premium is estimated at 10%. BCCI’s capital structure is 25% debt, paying an interest rate of 8%, and 75% equity. The debt sells at par. Buildwell pays tax at 21%. What is BCCI’s cost of equity capital? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
Consider the following information for Federated Junkyards of America. Debt: $76,000,000 book value outstanding. The debt is trading at 91% of book value. The yield to maturity is 10%. Equity: 2,600,000 shares selling at $43 per share. Assume the expected rate of return on Federated’s stock is 19%. Taxes: Federated’s marginal tax rate is Tc = 0.21. Calculate the weighted-average cost of capital (WACC). (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
Plastico, a manufacturer of consumer plastic products, is evaluating its capitalstructure. The balance sheet of the company is as follows (in millions):Assets LiabilitiesFixed assets $4,000 Debt $2,500Current assets $1,000 Equity $2,500In addition, you are provided the following information:• The debt is in the form of long-term bonds, with a coupon rate of 10%. The bondsare currently rated AA and are selling at a yield of 12% (the market value of the bonds is80% of the face value).• The firm currently has 50 million shares outstanding, and the current market priceis $80 per share. The firm pays a dividend of $4 per share and has a price/earnings ratioof 10.• The stock currently has a beta of 1.2. The riskfree rate is 8%.• The tax rate for this firm is 40%.a. What is the debt/equity ratio for this firm in book value terms? In market valueterms?b. What is the debt/(debt + equity) ratio for this firm in book value terms? In marketvalue terms?c. What is the firm’s after-tax cost of debt?
Plastico, a manufacturer of consumer plastic products, is evaluating its capitalstructure. The balance sheet of the company is as follows (in millions):Assets LiabilitiesFixed assets $4,000 Debt $2,500Current assets $1,000 Equity $2,500In addition, you are provided the following information:• The debt is in the form of long-term bonds, with a coupon rate of 10%. The bondsare currently rated AA and are selling at a yield of 12% (the market value of the bonds is80% of the face value).• The firm currently has 50 million shares outstanding, and the current market priceis $80 per share. The firm pays a dividend of $4 per share and has a price/earnings ratioof 10.• The stock currently has a beta of 1.2. The riskfree rate is 8%.• The tax rate for this firm is 40% Plastico is considering a major change in its capital structure. It has three options:• Option 1: Issue $1 billion in new stock and repurchase half of its…
Plastico, a manufacturer of consumer plastic products, is evaluating its capitalstructure. The balance sheet of the company is as follows (in millions):Assets LiabilitiesFixed assets $4,000 Debt $2,500Current assets $1,000 Equity $2,500In addition, you are provided the following information:• The debt is in the form of long-term bonds, with a coupon rate of 10%. The bondsare currently rated AA and are selling at a yield of 12% (the market value of the bonds is80% of the face value).• The firm currently has 50 million shares outstanding, and the current market priceis $80 per share. The firm pays a dividend of $4 per share and has a price/earnings ratioof 10.• The stock currently has a beta of 1.2. The riskfree rate is 8%.• The tax rate for this firm is 40%.a. What is the debt/equity ratio for this firm in book value terms? In market valueterms?b. What is the debt/(debt + equity) ratio for this firm in book value terms? In marketvalue terms?c. What is the firm’s after-tax cost of…
Consider the following information for Federated Junkyards of America. Debt: $65,000,000 book value outstanding. The debt is trading at 86% of book value. The yield to maturity is 9%. Equity: 1,500,000 shares selling at $32 per share. Assume the expected rate of return on Federated’s stock is 18%. Taxes: Federated’s marginal tax rate is Tc = 0.21. Calculate the weighted-average cost of capital (WACC).
Twill Consulting has total assets of $1,810. These assets are expected to increase in value to either $1,900 or $2,400 by next year. The company has a pure discount bond outstanding with a face value of $2,000. This bond matures in one year. Currently, U.S. Treasury bills are yielding 5.5 percent. What is the value of the equity in this firm? Multiple Choice $7.24 $6.98 $7.89 $6.67 $7.08
The company has equity of € 35,000 and interest-bearing debt of € 15,000. The interest premium on the company's new loans (ie the interest margin) is 0.5%, the risk-free interest rate is 4.5%, and the general market risk premium is 4%. The beta calculated from the financial statements describing the company's risk is 0.8, taxes are not taken into account. Please indicate your answer to two decimal places. a) Calculate the average cost of capital for a company, WACC? b) The company decides to change its capital structure by taking out a new loan of EUR 20 000. What is the return on equity requirement with a changed capital structure?
The company Nexti AS has 2 million shares outstanding with a market price of NOK 30 per share and with an equiry beta equal to 1.5. The book value of equity is NOK 40 million. The company also has NOK 70 million in long-term debt, the debt beta is equal to zero. Risk-free interest rate is 3% and the market risk premium is 7%. The company pays 30% income tax. (There is nobody investor tax, Se=Sk=0) a) What would the value of the company be worth if it were 100% equity financed? b) What would the company's cost of equity be if the company is financed with 100% equity?
The total market value of the common stock of the Okefenokee Real Estate Company is $11.5 million, and the total value of its debt is $7.3 million. The treasurer estimates that the beta of the stock is currently 1.2 and that the expected risk premium on the market is 9%. The Treasury bill rate is 3%. Assume for simplicity that Okefenokee debt is risk-free and the company does not pay tax. a. What is the required return on Okefenokee stock? Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. b. Estimate the company cost of capital. Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. c. What is the discount rate for an expansion of the company's present business? Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. d. Suppose the company wants to diversify into the manufacture of rose-colored spectacles. The beta of unleveraged…

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