Assume that the beta of an all equity firm is 1.0, that the risk-free rate is 4 percent, and that the firm's required rate of return (using CAPM) is 10 percent. If the firm changes its capital structure to 40% debt and 60% equity, where the yield (cost) of debt is 6%, and if the tax rate is 40%, then determine what the new required rate of return on the firm's newly levered equity will be, based on CAPM. (You may assume that the beta for debt is zero.) 11.54% 10.90% 11.20% 12.40% O 11.93%

Assume that the beta of an all equity firm is 1.0, that the risk-free rate is 4 percent, and that the firm's required rate of return (using CAPM) is 10 percent. If the firm changes its capital structure to 40% debt and 60% equity, where the yield (cost) of debt is 6%, and if the tax rate is 40%, then determine what the new required rate of return on the firm's newly levered equity will be, based on CAPM. (You may assume that the beta for debt is zero.) 11.54% 10.90% 11.20% 12.40% O 11.93%

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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Consider a two-date binomial model. A company has both debt and equity in its capital structure. The value of the company is 100 at Date 0. At Date 1, it is equally like that the value of the company increases by 20% or decreases by 10%. The total promised amount to the debtholders is 100 at Date 1. The riskfree interest rate is 10%. a. What are the possible payoffs to the equityholders at date 1? What kind of financial product has the same payoffs? Please describe the detailed characteristics of the financial product. b. What are the possible payoffs to the bondholders at date 1? Are they riskfree? What kind of financial product/portfolio has the same payoffs? Please describe the detailed characteristics of the financial product/portfolio.
Calculate the company's asset beta, if the firm's equity beta is 1.6, the debt equity ratio is 0.6 and the marginal tax rate is 30%. Select a O O 1.1268 2.1268 O 1.2618 2.216
Tele LLC has a beta of 1.4 and is trying to calculate its cost of equity capital. If the risk-free rate of return is 9 percent and the average market return 14 percent, then what is the firm's after-tax cost of equity capital if the firm's marginal tax rate is 30 percent?
Assume the risk-free rate is 4% and the beta for a particular firm is 2, current firm share price is $35 and the market risk premium is 8%. A.Given the risk level, what is the one-year required rate of return (we will call this k)? B.If next year’s expected dividend is $3, use k from part A to solve for the expected next year’s price.
You have the following initial information on which to base your calculations and discussion: Debt yield = 2.6% Required Rate of Return on Equity = 12% Expected return on S&P500 = 10% Risk-free rate (rF) = 1.5% Inflation = 2.5% Corporate tax rate (TC) = 30% Current long-term and target debt-equity ratio (D:E) = 1:3 a. What is the unlevered cost of equity (rE*) for this firm? Assume that the management of the firm is considering a leveraged buyout of the above company. They believe that they can gear the company to a higher level due to their ability to extract efficiencies from the firm’s operations. Thus, they wish to use a target debt-equity ratio of 3:1 in their valuation calculations. b. What would the levered cost of equity equal for this firm at a debt-equity ratio (D:E) of 3:1? c. What would the required rate of return for the company equal if it were to be acquired under the leveraged buyout structure (i.e., what would the estimated firm WACC equal to under a…
An all equity financed company currently has a beta of 1.2 and a marginal tax rate of 20%. The expected return on the market is 8%. The risk-free rate of return is 3%. The company's before-tax cost of debt is 5%. The company decides to alter its capital structure and will target 50% debt, which will remain constant. What is this company's new weighted average cost of capital (WACC)? a) 6.5% b) 7.7% c) 8.9% d) 10.2%
Consider a two-date binomial model. A company has both debt and equity in its capital structure. The value of the company is 100 at Date 0. At Date 1, it is equally like that the value of the company increases by 20% or decreases by 10%. The total promised amount to the debtholders is 100 at Date 1. The riskfree interest rate is 10%. a. What is the value of the debt at Date 0? What is the value of the equity at Date 0? b. Suppose the government announces that it guarantees the company’s payment to the debtholders. How much is the government guarantee worth?
I need help, please show me the calculation Questions: The cost of capital for a firm with a 60/40 debt/equity split, 4.5% cost of debt, 15% cost of equity, and a 35% tax rate would be? The risk free rate currently have a return of 2.5% and the market risk premium is 4.22%. If a firm has a beta of 1.42, what is its cost of equity? How much should you pay for a share of stock that offers a constant growth rate of 10%, requires a 16% rate of return, and is expected to sell for $77.77 one year from now?
Terex company has a beta of 1.7 and is trying to calculate its cost of equity capital. If the risk-free rate of return is 5 percent and the average market return 16 percent, then what is the firm's after-tax cost of equity capital if the firm's marginal tax rate is 30 percent? Select one: a. 22.8 % b. 22.5 % c. 23.7 % d. None of these
The unlevered beta is 1.0. The both the risk-free rate and market risk premium is 5%. The applicable corporate tax rate for the company is 30%. What is the Weighted Average Cost of Capital on the optimal capital structure? (No rounding off until the final answer)
Assume the risk free rate is 4% and the beta for a particular firm is 2, current firm share price is $35 and the market risk premium is 8%. Given the risk level what is the one year required rate of return (we will call this k)? If next year’s expected dividend is $3, use k from part A to solve for the expected next year’s price.
Tele LLC has a beta of 1.4 and is trying to calculate its cost of equity capital. If the risk-free rate of return is 9 percent and the average market return 14 percent, then what is the firm's after-tax cost of equity capital if the firm's marginal tax rate is 30 percent? Select one: O a. 22 % O b. None of these O c. 12 % O d. 16 %

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