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Ch. 13. For questions 7, 8, and 9, use the following information:
7.) Consider a firm whose debt has a market value of $35 million and whose stock has a market value of $55 million. The firm pays a 7 percent rate of interest on its new debt and has a beta of 1.23. The corporate tax rate is 21%. Assume that the security market line holds, that the risk premium on the market is 10.5 percent, and that the current Treasury bill is rate is 1 percent. What is the aftertax cost of debt?
Format as a percentage and round to two places past the decimal point as "X.XX"
5.53
8.) Consider a firm whose debt has a market value of $35 million and whose stock has a market value of $55 million. The firm pays a 7 percent rate of interest on its new debt and has a beta of 1.23. The corporate tax rate is 21%. Assume that the security market line holds, that the risk premium on the market is 10.5 percent, and that the current Treasury bill is rate is 1 percent. Using the pretax cost of debt from Question 7, what is the
Format as a percentage and round to two places past the decimal point as "XX.XX"
9.) Consider a firm whose debt has a market value of $35 million and whose stock has a market value of $55 million. The firm pays a 7 percent rate of interest on its new debt and as a beta of 1.23. The corporate tax rate is 21%. Assume that the security market line holds, that the risk premium on the market is 10.5 percent, and that the current Treasury bill is rate is 1 percent. Using the answers from Questions 7 and 8, what is the firm’s WACC?
Format as a percentage and round to two places past the decimal point as "X.XX"
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- Assume that Firms U and L are in the same risk class and that both have EBIT=$500,000. Firm U uses no debt financing, and its cost of equity is rsU=14%. Firm L has $1 million of debt outstanding at a cost of rd=8%. There are no taxes. Assume that the MM assumptions hold. Graph (a) the relationships between capital costs and leverage as measured by D/V and (b) the relationship between V and D. Now assume that Firms L and U are both subject to a 40% corporate tax rate. Using the data given in Part b, repeat the analysis called for in b(1) and b(2) using assumptions from the MM model with taxes.arrow_forwardIf the stocks are less risky than bonds, then the risk premium on stock may be zero. Assuming that the risk-free interest rate is 2 percent, the growth rate of dividends is 1 percent and the current level of dividends is $70, use the dividend-discount model to compute the level of the S&P 500 that is warranted by the fundamentals. Compare the result to the current S&P 500 level of 4300, and explain one possible reason for the difference.arrow_forward8)Glassmakers has the below characteristics. The premerger debt is $5, the premerger equity is $10. The risk free rate is 6%. The premerger beta is 1.36. The tax rate is 40%. The cost of debt premerger is 11%. The expected market rate of return is 10%. What discount rate should you use to discount Glassmakers' free cash flows and interest tax savings? 10.01% 10.06% 11.29% 11.44% 13.49%arrow_forward
- 6arrow_forwardCorporate Finance Consider a company where the market value of debt and equity are 25% and 75%,respectively of total Enterprise Value. The company’s debt yields 200bps over the risk free interest rate of 5.25%. The company’s tax rate is 21%. The beta of the company’s stock is 1.2. Assuming the equity risk premium is 4.5%, what is the company’s after-tax WACC?arrow_forward↑ Ganado and Equity Risk Premiums. Maria Gonzalez, Ganado's Chief Financial Officer, estimates the risk-free rate to be 3.50%, the company's credit risk premium is 4.50%, the domestic beta is estimated at 1.06, the international beta is estimated at 0.75, and the company's capital structure is now 25% debt. The before-tax cost of debt estimated by observing the current yield on Ganado's outstanding bonds combined with bank debt is 8.30% and the company's effective tax rate is 35% Calculate both the CAPM and ICAPM weighted average costs of capital for the following equity risk premium estimates 8.10% b. 7.00% 6.5.00% d. 3.90% ++ a. Using the domestic CAPM, what is Ganado's weighted average cost of capital of the fom's equity risk premium is 10% (Round to two decimal places) tude 1.1.... oline mearrow_forward
- 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 0arrow_forwardwhich option is correctarrow_forwardThe total market value of the common stock of the Okefenokee Real Estate Company is $11.5 million, and the total value of its debt is $7.3 million. The treasurer estimates that the beta of the stock is currently 1.2 and that the expected risk premium on the market is 9%. The Treasury bill rate is 3%. Assume for simplicity that Okefenokee debt is risk-free and the company does not pay tax. a. What is the required return on Okefenokee stock? Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. b. Estimate the company cost of capital. Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. c. What is the discount rate for an expansion of the company's present business? Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. d. Suppose the company wants to diversify into the manufacture of rose-colored spectacles. The beta of unleveraged…arrow_forward
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