are the break-even EBITS for Beta and Gamma, Beta and Delta, and Gamma and Delta Companies if the corporate tax rate is 40% for all three companies?
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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.
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- Consider two firms that are identical in every respect EXCEPT for their capital structures. The unlevered firm is financed entirely by equity whereas the capital structure of the levered firm includes $30,000 of debt at 12%.The annual earnings of both companies before interest are the same, $10,000. The cost of equity in the unlevered firm is 15% and in the levered company at 16%. A) Determine the market values of the two companies. B) Suppose an investor owns 1% of the equity in the levered firm, describe the arbitrage process.ABC Company and XYZ Company are identical firms in all respects except for their capital structure. ABC is all - equity financed with $650,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $325,000 and the interest rate on its debt is 6.5 percent. Both firms expect EBIT to be $ 71,000. Ignore taxes. What is the cost of equity for ABC and XYZ?Qwert Typewriter Company and Yuiop Typewriters SAOG are identical except for capital structures. Qwert has 50 % debt and 50 % equity financing, whereas Yuiop has 20 % debt and 80 % equity financing. The borrowing rate for both companies is 13 % in a no-tax world and capital markets are assumed to be perfect. The earnings of both companies are not expected to grow, and all earnings are paid out to shareholders in the form of dividends.) a) If you own 2 % of the common stock of Qwert, what is your OMR return if the company has net operating income of OMR 360,000 and the overall capitalization rate of the company, Ko is 18 %? What is the inferred equity capitalization rate, ke? b) Yuiop has the same net operating income as Qwert. What is the inferred equity capitalization rate of Yuiop? Why does it differ from that of Qwert?
- Two firms, Candy and Yelpful, have identical assets and generate identical cash flows. Candy is an all-equity firm with 1 million shares outstanding that trade at a price of $25 per share. Yelpful has 5 million shares outstanding and $10 million in debt at an interest rate of 4%. According to MM Proposition I, the stock price for Yelpful is closest to: a. $15 b. $3 c. $5 d. $25The Rivoli Company has no debt outstanding, and its financial position is given by the following data: What is Rivoli’s intrinsic value of operations (i.e., its unlevered value)? What is its intrinsic stock price? Its earnings per share? Rivoli is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 30% debt based on market values, its cost of equity, rs, will increase to 12% to reflect the increased risk. Bonds can be sold at a cost, rd, of 7%. Based on the new capital structure, what is the new weighted average cost of capital? What is the levered value of the firm? What is the amount of debt? Based on the new capital structure, what is the new stock price? What is the remaining number of shares? What is the new earnings per share?Abacus Calculation Company and Zoom Calculators Inc. are identical except for capital structures. Abacus has 50% debt and 50% equity, whereas Zoom has 30% debt and 70% percent equity. The borrowings rate for both companies is 8% in a no tax world, and capital markets are assumed to be perfect. i. If you own 4 percent of the stock of Abacus, what is dollar return if the company has net operating income of $3,60000 and the overall capitalization rate of the company is 18%? ii. What is the implied required rate of return on equity? Zoom has the same net operating income as Abacus. What is the implied required equity return of Zoom? Why does it differ from that of Abacus?
- Delta Corporation has the following capital structure: Debt (d) Preferred stock (Kp) Common equity (K) (retained earnings) Weighted average cost of capital (Kg) Capital structure size (X) Cost (aftertax) million 6.6% 11.2 11.2 Weights 20% 10 70 Weighted Cost a. If the firm has $49 million in retained earnings, at what size capital structure will the firm run out of retained earnings? Note: Enter your answer in millions of dollars (e.g., $10 million should be entered as "10". 4 1.32% 1.12 7.84 10.28% b. The 6.6 percent cost of debt referred to earlier applies only to the first $23 million of debt. After that the cost of debt will go up. At what size capital structure will there be a change in the cost of debt? Note: Enter your answer in millions of dollars (e.g., $10 million should be entered as "10",ABC and XYZ are identical firms in all respects except for their capital structures. ABC is all-equity financed with $530,000 in stock. XYZ has the same total value but uses both stock and perpetual debt; its stock is worth $310,000 and the interest rate on its debt is 7.9 percent. Both firms expect EBIT to be $62,222. Ignore taxes. Compute the costs of equity for both ABC and XYZ.Suppose Rocky Brands has earnings per share of $2.35 and EBITDA of $30.8 million. The firm also has 5.8 million shares outstanding and debt of $130.7 million (net of cash). You believe Jared's Outdoor Corporation is comparable to Rocky Brands in terms of its underlying business, but Jared's has no debt. If Jared's has a P/E of 13.3 and an enterprise value to EBITDA multiple of 7.6, estimate the value of Rocky Brands stock using both multiples. Which estimate is likely to be more accurate? Rocky Brands' stock price per share by using the P/E ratio is $ per share. (Round to two decimal places.)
- Kaye’s Kitchenware has a market/book ratio equal to 1. Itsstock price is $12 per share and it has 4.8 million shares outstanding. The firm’s total capital is $110 million and it finances with only debt and common equity. What is itsdebt-to-capital ratio?Portneuf Industries has a debt-equity ratio of 1.5. Its WACC is 8.4%, and its cost of debt is 5.9%. The corporate tax rate is 35%. (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places.) a. What is the company's cost of equity capital? Cost of equity capital b. What is the company's unlevered cost of equity capital? Unlevered cost of equity capital 2.65 % c-1. What would the cost of equity be if the debt-equity ratio were 2? Cost of equity 2.65 % Cost of equity 0.73 % c-2. What would the cost of equity be if the debt-equity ratio were 1.0? Cost of equity c-3. What would the cost of equity be if the debt-equity ratio were zero? 11.5% %Suppose Rocky Brands has earnings per share of $2.39 and EBITDA of $29.7 million. The firm also has 5.9 million shares outstanding and debt of $130 million (net of cash). You believe Jared's Outdoor Corporation is comparable to Rocky Brands in terms of its underlying business, but Jared's has no debt. If Jared's has a P/E of 13.6 and an enterprise value to EBITDA multiple of 7.9, estimate the value of Rocky Brands stock using both multiples. Which estimate is likely to be more accurate? Rocky Brands' stock value by using the P/E ratio is $ The value of Rocky Brands by using the P/E ratio is $ per share. (Round to two decimal places.) million. (Round to one decimal place.)