A firm's stockholders expect a 12% rate of return, and there is $20M in common stock and retained earnings. The firm has $7M in loads at an average rate of 9%. The firm has raised $12M by selling bonds at an average rate of 5%. What is the firm's cost of capital?

A firm's stockholders expect a 12% rate of return, and there is $20M in common stock and retained earnings. The firm has $7M in loads at an average rate of 9%. The firm has raised $12M by selling bonds at an average rate of 5%. What is the firm's cost of capital?

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

See similar textbooks

Related questions

Q: a. Suppose Hardmon borrows to the point that its debt-equity ratio is 0.50. With this amount of…

A: HARDMON ENTERPRISESa)Expected Return18%Debt to Equity Ratio0.5Debt Cost of Capital5%Formula Expected…

Q: A firm has 8,000,000 ordinary shares outstanding. The current market price is `25 and the book value…

A: First we need to calculate Return on Equity (ROE) by using equation below.ROE = EPS/ Book…

Q: ry to evaluate an investment project for a company. A firm (Firm i) uses $38 million of debt and $15…

A: WACC is weighted average cost of debt , weighted cost of equity and weighted cost of preferred stock…

Q: b) Lanigan bank is funded 100% by equity. Last year's dividend was £2.60. The bank expects to be…

A: Step 1: Given Value for Calculation last year dividend = d = $2.60Growth rate = g = 2%Expected Rate…

Q: Hook Industries's capital structure consists solely of debt and common equity. It can issue debt at…

A: To determine the weight of debt in the company's capital structure, we first need to determine the…

Q: A company is interested in measuring its overall cost of capital. Current investigation has gathered…

A: Stocks are the security that represents the holder's ownership of the company. The stock entitles…

Q: How can i solve this problem without using excel? A financial calculator is ok. A stock is expected…

A: Stock price today is $23.26. Capital gain rate is 3.18%. Dividend yield of stock is…

Q: What is a firm's weighted-average cost of capital if its equity has a beta of 1.60, Government Bonds…

A: The weighted average cost of capital is calculated to determine the average cost of raising funds…

Q: Suppose that a firm has 700,000 outstanding shares, each valued at Php 141. Suppose further that the…

A: Total number of shares outstanding is 700,000 Value of share is Php 141 Replacement cost of physical…

Q: Lance Inc.'s free cash flow was just $2.00 million. If the expected long-run growth r 6.0%, if the…

A: WACC is the cost of capital and is the weighted cost of equity and weighted cost of debt and is…

Q: Suppose a firm has a EBIT of $450, Depreciation of $65, taxes of $50, change in NWC of $35, and net…

A: The value of the firm is the present value of all the future cash flows expected from the firm…

Q: You expect that Flex Industries (FI) will have earnings per share of $2 this year and that they will…

A: The growth rate in dividends is directly based on the investment made and return earned on the same.…

Q: A firm has just paid a dividend of $4.0. In a recent interview with the CFO, it was suggested that…

A: Growth rate is that % rate which shows % increase in any value. The higher the Growth rate of the…

Q: The Management of Uno Corporation is attempting to estimate the firm's cost of equity capital.…

A: Dividends of the corporation in dividend growth model are assumed to grow at a very constant rate in…

Q: Dorpac Corporation has a dividend yield of 1.9%. Its equity cost of capital is 7.1%, and its…

A: Given information: Dividend yield : 1.9% Equity cost of capital : 7.1%

Q: The FMS Corporation needs to raise investment money amounting to $40 million in new equity. The…

A: Cost of equity is the required rate of return shareholders expect from the company in order to…

Q: A firm is expected to have free cash flows of $50 million this year (FCF1=$50m). Free cash flows are…

A: The free cash flow valuation method is one of the techniques that entities employ to value their…

Q: Swallow Industries has a beta of 1.60, a stock price of $17, and recently paid an annual dividend of…

A: The objective of the question is to calculate the cost of equity capital for Swallow Industries…

Q: Dorpac Corporation has a dividend yield of 1.44%. Dorpac's equity cost of capital is 7.42%, and its…

A: Using Gordon’s growth model, the price of a share is calculated using the expected dividend, cost of…

Q: If the value of invested capital today is $4 million and this firm has $2 million in…

A: Invested Capital: It refers to that money that is invested by shareholders, lenders, and debt…

Q: If Microsoft's common stock is currently trading at $52.50 per share, and the company is expected to…

A: The cost of capital is the cost of obtaining funds from the public, and from an investor's point of…

Q: Dorpac Corporation has a dividend yield of 1.6%. Its equity cost of capital is 8.1%, and its…

A: Dividend The profit received by the company will be divided into two parts, the part distributed to…

Q: Assume capital markets are perfect (i.e. the Modigliani- Miller Theorems hold). The Cat Nap Pet…

A: In a world with perfect capital markets and the Modigliani-Miller Theorems, a firm's equity value is…

Q: What is a firm's weighted-average cost of capital if the stock has a beta of 2.45, Treasury bills…

A: The weighted average cost of capital is calculated to determine the average cost of raising funds…

Q: LNA, a firm that grows at a constant rate of 5%, is trying to estimate its weighted average cost of…

A: The cost of equity can be calculated with the help of dividend discount model.

Q: Your firm currently has a large cash balance of $150M. It will generate a $40M free cash flow every…

A: Cum-dividend price per share and ex-dividend price per share When a company declares that there…

Q: Suppose Alcatel-Lucent has an equity cost of capital of 10.2%, market capitalization of $11.20…

A: Years0123FCF-$100.00$55.00$103.00$74.00Debt$38.84$31.34$13.57$0.00Interest$0.00$2.52$2.04$0.88Equity…

Q: Your firm currently has net income to common equity of $1,500,000 and a dividend payout of 30%. If…

Q: The firm is financed with debt and equity. The book value of the debt is $10,000,000; the book value…

A: Weighted average cost of capital (WACC) refers to the average cost that is paid by a company to…

Q: 6. Jemisen's has expected earnings before interest and taxes of £6,200. Its unlevered cost of…

A: Weighted average cost of capital (WACC) is the average cost of capital. It can be calculated by…

Q: A firm's stock is selling at 15 pesos. They just paid a 2 peso peso dividend and are expected to…

A: Capital gains yield: Capital gains yield measures the gain or loss with the difference between the…

Q: You expect KT industries (KTI) will have earnings per share of $ 4 this year and expect that they…

A: Dividend refers to portion of total earnings of entity that is shared with common stockholders.…

Q: What will be the expected return of equity after this transaction?

A: Information Provided: Expected Return = 16% Debt-Equity Ratio = 0.50 Cost of capital = 6%

Q: Dorpac Corporation has a dividend yield of 1.6%. Its equity cost of capital is 7.7%, and its…

A: Solution:Dividend yield means the percentage of expected dividend after one year to the current…

Q: A firm just paid its annual dividend of $5.50 per share. The stock market price of $58.25 and a beta…

A: CAPM stands for capital asset pricing model.This model explains the relationship between systematic…

Q: Start-Up Industries is a new firm that has raised $400 million by selling shares of stock Management…

A: Raised amount (Book value)$400 millionReturn on equity20%Cost of equity12%Retention ratio50%

Q: Dorpac Corporation has a dividend yield of 2.3%. Dorpac's equity cost of capital is 8.2%, and its…

A: The Gordon growth model states that the stock price can be calculated by discounting all the future…

Q: Estimate your firm's Weighted Average Cost of Capital. Assume that the current risk-free rate of…

A: Weighted average cost of capital(WACC) is the average cost of capital, which can be calculated by…

Q: MM Ferguson's market value of common stock is $35.4 million, and its risk-free debt is $13.1 million…

A: WACC is also known as Weighted Average Cost of Capital. It includes the cost of debt & cost of…

Q: 12.30% 13.36%

A: D0=Dividend =1.45 g=constant growth =6.5% Price of equity =22.5 D1=1.45(1.065)=1.544=Dividend next…

Q: Estimate your firm’s Weighted Average Cost of Capital. Assume that the current risk-free rate of…

A: Given information: Risk free rate of interest is 3.5% Risk premium is 5% Corporate tax rate is 21%

Q: Dorpac Corporation has a dividend yield of 1.5%. Its equity cost of capital is 8.7%, and its…

A: Dividend discount model refers to a stock valuation model which is used by the company for…

Q: A company had free cash flows of $788 million last year. Free cash flows are expected to grow at…

A: Free cash flow method is used to calculate the profitability of the firm by valuating overall health…

Q: An all-equity firm will spend $1,500,000 to expand the business. It has $100,000 in cash, can borrow…

A: Solution We are provided with the following information Expansion Cost = $ 1,500,000 Financing with…

Q: The most recent free cash flows of a firm were $15 million. They are expected to grow at a constant…

A: Free cash flow model is valuation model used to value the firm and value from equity.

Q: A firm has a bank loan with a 10% interest rate. The firm also has in issue 8% preference shares…

A: Cost of Debt = cd = 10%Cost of Preferred Stock= cp = 8%Cost of Equity = ce = 18%Tax Rate = t =…

Q: Start-Up Industries is a new firm that has raised $360 million by selling shares of stock.Management…

A: The objective of the question is to calculate the ratio of market value to book value for Start-Up…

Q: A firm has equity with market value $100 million and debt with market value at $70 million. The debt…

A: Equity valuation is the process of determining the fair value of a company's stock. This involves…

Question

A firm's stockholders expect a 12% rate of return, and there is $20M in common stock and
retained earnings. The firm has $7M in loads at an average rate of 9%. The firm has raised
$12M by selling bonds at an average rate of 5%. What is the firm's cost of capital?

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

Dorpac Corporation has a dividend yield of 1.7%. Its equity cost of capital is 7.7%, and its dividends are expected to grow at a constant rate. a. What is the expected growth rate of Dorpac's dividends? b. What is the expected growth rate of Dorpac's share price?
3. Toran plc. is an all-equity financed firm and generates earnings of £200 per year. Its current required rate of return on equity is 10% per annum. It is planning to issue corporate debt at a rate of 8% to achieve a debt-equity ratio of 50%. Toran plc. Assume that debt and earnings are perpetuities. What happens to the firm value after the debt issuance? Assume there are perfect capital markets. 100 0 200 0 250 0 400 0 450 0
Your firm has $2,100,000 in stock assets with a duration of 12 and $900,000 in cash with a duration of 0. Your firm has issued debt with a present value of $1,700,000 and a duration of 16. The yield curve is flat at 4.35%. a) What is the value of equity? b) What is the duration of equity?
What is the cost of equity based on the dividend growth model? What is the cost of equity based on the security market line? What market weights should be given to the various capital components in the weighted average cost of capital computation What is the weighted average cost of capital using the cost equity calculated based on CAPM?
A firm is currently an all equity firm that has 510,000 shares of stock outstanding with a market price of $53.60 a share. The current cost of equity is 10.5 percent and the tax rate is 25 percent. The firm is considering adding $7.10million of debt with a coupon rate of 6 percent to its capital structure. The debt will be sold at par value. What is the levered value of the equity ?
Dorpac Corporation has a dividend yield of 1.4%. Its equity cost of capital is 7.8%, and its dividends are expected to grow at a constant rate. a. What is the expected growth rate of Dorpac's dividends? b. What is the expected growth rate of Dorpac's share price? a. What is the expected growth rate of Dorpac's dividends? The growth rate will be %. (Round to one decimal place.)
Based on a discounted free cash flow method, you have estimated the value of a firm to be $270 million. The company has $110 million of long-term debt outstanding (common equity comprises the rest). There are 14.0 million shares of common stock outstanding. What is the firm's estimated intrinsic value per share of common stock?
What is the value of this levered firm? EBIT is $750,000 with an unleveredcost of equity of 10%, tax rate of 21%, and the firm just issued a $1,000,000 bond with a coupon of 6%.
ACME, Inc. forecasts that it will have the free cash flows shown below. The free cash flows are expected to grow by 4% per year after year 3. Year 1 23 FCF (S million) 20 48 54 The weighted average cost of capital is 11%. The firm has $40 million of debt and 10 million shares outstanding. What is a good estimate of ACME's share price? O $55.25 $27.30 $60.70 $38.55
A firm wants a sustainable growth rate of 2.73 percent while maintaining a dividend payout ratio of 39 percent and a profit margin of 6 percent. The firm has a capital intensity ratio of 2. What is the debt-equity ratio that is required to achieve the firm's desired rate of growth?
An all-equity-financed firm plans to grow at an annual rate of at least 25%. Its return on equity is 39%. What is the maximum possible dividend payout rate the firm can maintain without resorting to additional equity issues?
Dorpac Corporation has a dividend yield of 1.6%. Its equity cost of capital is 7.8%, and its dividends are expected to grow at a constant rate. a. What is the expected growth rate of Dorpac's dividends? b. What is the expected growth rate of Dorpac's share price? a. What is the expected growth rate of Dorpac's dividends? The growth rate will be %. (Round to one decimal place.) b. What is the expected growth rate of Dorpac's share price? What is the expected growth rate of Dorpac's share price? (Select the best choice below.) A. With constant dividend growth, the share price is expected to grow at rate g= 6.2% – 1.6% = 4.6%. B. With constant dividend growth, the share price is expected to grow at rate g= 6.2%. C. With constant dividend growth, the share price is expected to grow at rate g = 1.6%. D. With constant dividend growth, the share price is expected to grow at rate g= 7.8%.

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

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

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

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

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS