Company 7 has 10% debt and a cost of debt of 5.5%. The firm's WACC is currently 11.35%. Assume there are no taxes and that the Modigliani-Miller theorem holds. A. What is the company's cost of equity? B. If the company converts to 25% debt, what will its cost of equity be? What is the company's WACC? C. If the company converts to 50% debt, what will its cost of equity be? What is the company's WACC in this case?

Company 7 has 10% debt and a cost of debt of 5.5%. The firm's WACC is currently 11.35%. Assume there are no taxes and that the Modigliani-Miller theorem holds. A. What is the company's cost of equity? B. If the company converts to 25% debt, what will its cost of equity be? What is the company's WACC? C. If the company converts to 50% debt, what will its cost of equity be? What is the company's WACC in this case?

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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94. Glass Growers has no debt. Its cost of capital is 8.7 percent. Suppose the firm converts to a debt-equity ratio of 0.65. The interest rate on the debt is 6.9 percent. What is its new WACC?
Horford Co. has no debt. Its cost of capital is 10 percent. Suppose the company converts to a debt-equity ratio of 1. The interest rate on the debt is 7.1 percent. Ignore taxes for this problem. a.What is the company’s new cost of equity? b.What is its new WACC?
Micolash Industries plans to reduce the use of debt financing and increase the use of equity financing (for example, move from a 70% Debt-to-Capital Ratio to 50%). Assume that the company, which does not pay any dividends, takes this action, and that total assets, operating income (EBIT), and its tax rate (say 40%) all remain constant. Which of the following would occur? Group of answer choices The company’s interest expense would remain constant. The company would have less common equity than before. The company’s taxable income (EBT) would fall. The company would have to pay more taxes. The company’s net income would decrease.
Jones Soda estimates that its required return on equity is 11.0 percent and the yield to maturity on its debt is 5.0 percent. The company's equity-to-asset ratio is 0.7 and the marginal tax rate is 30%. What is the company's weighted average cost of capital? Enter your answer as a percent and round to two decimals, but don't include the % sign.
Suppose Essen Corp has the following weights and costs. What is the WACC if the company has a 21% tax rate? Component Common equity Debt (before tax) R 11.5% 0.8 0.2 7.5% 10.39% ()8.71% ()6.25% 9.50% 10.70% Page 29 of 30 Previous Page Next Page
Crowley Company has a capital structure with 30% debt at a 9% interest rate. Its beta is 1.3, the risk-free rate is 1.5%, and the market risk premium is 8%. The company has no preferred stock. Its combined federal-plus-state tax rate is 25%. a. Calculate the company's cost of equity b. Calculate the company's weighted average cost of capital c. Calculate he the company’s unlevered cost of equity
Abacus Company has 30% debt and 70% equity. The borrowing rate is 12%. (1) If you own 5% of the stock of Abacus, what is your dollar return if the overall capitalization rate, Ko, is 20%? (2) What is the implied required rate of return on equity if the total value of the firm is 1,500,000? Select one: a. None of the other three answers b. Dollar return=246000. c. Dollar return3D12300. d. Dollar return=54000.
A company finances its operations with 57 percent debt and the rest using equity. The annual yield on the company's debt is 6% and the required rate of return on the stock is 14.6%. What is company's WACC? Assume the tax rate is 30%
Linkcomn expects an Eamnings after Taxes of 7500005 every year. The firm currently has 100% Equity and cost of raising equity is 12%. If the company can borrow debt with an interest of 10% What will be the value of the company if the company takes on a debt equal to 60% of its unlevered value? What will be the value of the company if the company takes on a debt equal to 50% of its levered value? Assume the company's tax rate is 30% (Must show the steps of calculation)
Alpha Co. has a debt-equity ratio of 0.6, a pretax cost of debt of 7.5 percent, and an unlevered cost of equity of 12 percent. What is Alpha's cost of equity if you ignore taxes? Multiple choice question. 16.5% 9.3% 14.7% 12% Explain why
Ursala, Incorporated, has a target debt-equity ratio of 1.20. Its WACC is 8.7 percent, and the tax rate is 25 percent. a. If the company's cost of equity is 13 percent, what is its pretax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. If instead you know that the aftertax cost of debt is 5.8 percent, what is the cost of equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. Cost of debt b. Cost of equity 6.31 % 13.39 %
Blue Co. has a total liabilities of P400,000 on which 40% is a long-term liability. The non-current asset of the firm is half of the total asset and it is determined that its current ratio is 3:1. If the firm has a net profit of P144,000, what will be the return on asset? (type the answer in percentage with “%”)

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