ABC Corp, has a market value of debt to equity ratio of 1.5 (ie, market value of debt to market value of equity ratio=1.5). Its book value of debt to equity ratio (book value of debt to book value of equity) is 0.5. Thefirm's bonds have a low credit rating with an annual coupon rate of 8%. The current yield to maturity of its bonds is 11%. The company has an equity beta of 1.5 and a debt beta of 0.4.Assume that the risk-free interest rate is 1% and expected market risk premium is 5% ABC Corp, faces a tax rate of 21%. Suppose its management is considering a project that has the same risk and same financingmix as the firm. The cost of capital for the project is %Instruction: Type ONLY your numerical answer in the unit of percentage % sign is already there. Thus, so don't input the % sign. Round to the nearest two decimal places. Eg, if your answer is 10.136%, then input10.14

Cost of capital can be determined by using the formula of weighted average cost of capital by adding…

Answered: ABC Corp has a market value of debt to…

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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TT Industries is trading for $20 per share and has 25 million shares outstanding. TT Industries has a debt-equity ratio of 0.4 and its debt is zero coupon debt with a ten-year maturity and a yield to maturity of 8%. Which of the following best describes TT's debt using a put option? A) Short $200 million in risk-free debt and Long a put option on the firm's assets with a $200 strike price B) Long $200 million in risk-free debt and Short a put option on the firm's assets with a $700 strike price C) Long $200 million in risk-free debt and Short a put option on the firm's assets with a $200 strike price D) Short $200 million in risk-free debt and Long a put option on the firm's assets with a $700 strike price
Epson has one bond outstanding with a yield to maturity of 5% and a coupon rate of 8%. The company has no preferred stock. Epson's beta is 1.5, the risk-free rate is 2.2% and the expected market risk premium is 6%. Epson has a target debt/equity ratio of 0.7 and a marginal tax rate of 34%. 1. What is Epson's (pre-tax) cost of debt? 2. What is Epson's cost of equity? 3. What is Epson's capital structure weight for equity, i.e., the fraction of long-term capital provided by equity? 4. What is Epson's weighted average cost of capital?
XYZ Corp. has bonds outstanding with a coupon rate of 2% and a YTM of 5.7%. The risk - free rate of return is 2.2% and the market is returning 10.0%. The stock has a beta of 0.9 and the firm is financed with 45% debt and 55% equity. If the tax rate is 24%, what is XYZ's WACC?
Ripple Wine Merchants has 10,700 shares of stock outstanding at a price per share of $63. The risk-free rate is 2.8% and the expected market return is 9.8 %. Ripple has a beta of 1.59. The company also has 320 bonds outstanding, with a par value of $1000 per bond. The after-tax cost of debt is 5.89% and the bonds sell for 93.6% of par. What is the firm's WACC if the tax rate is 21%? O Multiple Choice 9.52% 9.44% 9.78% 9.14%
Ganado and Equity Risk Premiums. Maria Gonzalez, Ganado's Chief Financial Officer, estimates the risk-free rate to be 3.20%, the company's credit risk premium is 4.50%, the domestic beta is estimated at 1.01, the international beta is estimated at 0.75, and the company's capital structure is now 40% debt. The before-tax cost of debt estimated by observing the current yield on Ganado's outstanding bonds combined with bank debt is 7.90% and the company's effective tax rate is 42%. Calculate both the CAPM and ICAPM weighted average costs of capital for the following equity risk premium estimates. a. 8.70% b. 7.80% c. 6.00% d. 5.10% W
Bermuda Cruises issues only common stocks and coupon bonds. The firm has a debt-equity ratio of 0.45. The cost of equity is 17.6 percent. Required: What is the pre-tax cost of the company debt if weighted average costs of the company is 13.5% and the firm's tax rate is 35 percent?. Week 9 Western Electric has 35,000 ordinary shares outstanding at a price per share of $47 and a rate of return of 13.5%. The firm has 5,000 preference shares paying 7% dividend outstanding at a price of S58 a share. The preferred share has a par value of $100. The outstanding bond has a total face value of $450,000 and currently sells for 102% of face. The pre-tax yield-to-maturity on the bond is 8.49%. Required: a) Calculate the total market value of the firm. b) Calculate the capital structure of the firm. (Please round up the result at 3 decimal places) c) Calculate the firm's weighted average cost of capital if the tax rate is 30%, assuming a classical tax system.
A company just paid $1.23 in dividends per share, and it has a dividend payout of 38%. Considering that the PE ratio is 8 times, determine the price of this company’s individual stocks. d. If the coupon rate of a bond is 3.05% and the yield to maturity is 6.48%, and if a bondholder has a marginal tax rate of 21%, determine their after tax yield in this case.
A firm's stock has a beta of 1.75, Treasury bills yield 3.8%, and the market portfolio offers an expected return of 9.5%. In addition to equity, the firm finances 26% of its assets with debt that has a yield to maturity of 7.4%. The firm is in the 28% marginal tax bracket. What is the company’s after tax cost of debt?
XYZ Corp. has a debt-to-equity ratio of 0.6 and an equity beta of 1.7. What will be the firm’s equity beta if it changes its target debt-to-equity ratio to 0.75? Assume the firm has risk-free debt.
Velma inc. pays taxes at the rate of 35% and has a D/E ratio of 2:3. There are no preferred equity. Velma bonds have a face value of 1000 will mature in the next 23 years with annual coupons of 5 1/2% and currently sells for 82% of its face value. Velma inc stock has a better of 1.4 and required rate of return on the market portfolio is 12% the applicable T bill rate is 7%. Determine the WACC.
Consider Rhye, amid-size pharmaceutical company. Rhye’s equity has a book value of $2.8 billion and a market value of $19.4 billion. Rhye’s debt, on the other hand, has a book value of $500 million and a market value of $600 million; the debt’s annual interest rate and yield to maturity are 6% and 5%, respectively. Currently, Rhye has a beta of 1.2 and faces a corporate tax rate of 35%. Also currently, the yield to maturity on 10-year U.S. Treasury Notes is 2.5%. The market risk premium remains around its historical average of 5.5%. so, what is Rhye's debt ratio, equity ratio, and WACC? Help me with this. TQ

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