Currently, Forever Flowers Inc. has a capital structure consisting of 20% debt and 80% equity. Forever's debt currently has an 9% yield to maturity. The risk-free rate (TRF) is 3%, and the market risk premium (rm- TRF) is 6%. Using the CAPM, Forever estimates that its cost of equity is currently 14.5%. The company has a 40% tax rate. a. What is Forever's current WACC? Round your answer to two decimal places. 12.68 % b. What is the current beta on Forever's common stock? Round your answer to two decimal places. 1.92 c. What would Forever's beta be if the company had no debt in its capital structure? (That is, what is Forever's unlevered beta, bu?) Do not round intermediate calculations. Round your answer to two decimal places. 1.67 Forever's financial staff is considering changing its capital structure to 40% debt and 60% equity. If the company went ahead with the proposed change, the yield to maturity on the company's bonds would rise to 10%. The proposed change will have no effect on the company's tax rate. d. What would be the company's new cost of equity if it adopted the proposed change in capital structure? Do not round intermediate calculations. Round your answer to two decimal places. 10.16 %

Currently, Forever Flowers Inc. has a capital structure consisting of 20% debt and 80% equity. Forever's debt currently has an 9% yield to maturity. The risk-free rate (TRF) is 3%, and the market risk premium (rm- TRF) is 6%. Using the CAPM, Forever estimates that its cost of equity is currently 14.5%. The company has a 40% tax rate. a. What is Forever's current WACC? Round your answer to two decimal places. 12.68 % b. What is the current beta on Forever's common stock? Round your answer to two decimal places. 1.92 c. What would Forever's beta be if the company had no debt in its capital structure? (That is, what is Forever's unlevered beta, bu?) Do not round intermediate calculations. Round your answer to two decimal places. 1.67 Forever's financial staff is considering changing its capital structure to 40% debt and 60% equity. If the company went ahead with the proposed change, the yield to maturity on the company's bonds would rise to 10%. The proposed change will have no effect on the company's tax rate. d. What would be the company's new cost of equity if it adopted the proposed change in capital structure? Do not round intermediate calculations. Round your answer to two decimal places. 10.16 %

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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(Individual or component costs of capital) Compute the cost of capital for the firm for the following: a. A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 10.5 percent. Interest payments are $52.50 and are paid semiannually. The bonds have a current market value of $1,121 and will mature in 10 years. The firm's marginal tax rate is 34 percet. b. A new common stock issue that paid a $1.84 dividend last year. The firm's dividends are expected to continue to grow at 6.4 percent per year, forever. The price of the firm's common stock is now $27.92. c. A preferred stock that sells for $134, pays a dividend of 9.1 percent, and has a $100 par value. d. A bond selling to yield 11.7 percent where the firm's tax rate is 34 percent. a. The after-tax cost of debt is %. (Round to two decimal places.)
K SIROM Scientific Solutions has $10 million of outstanding equity and $5 million of bank debt. The bank debt costs 5% per year. The estimated equity beta is 2. If the market risk premium is 8% and the risk-free rate is 5%, compute the weighted average cost of capital if the firm's tax rate is 30%. OA. 15.17% OB. 17.44% O C. 15.93% OD. 16.68% ...
ABC Inc. is expected to pay a $2.50 dividend at year end (D1 = $2.50), the dividend is expected to grow at a constant rate of 5.50% a year, and the common stock currently sells for $52.50 a share. The before-tax cost of debt is 7.50% and the tax rate is 40%. The target capital structure consist of debt and 55% common equity. What is the companys WACC if all the equity used is from retained earnings?
Optimist Company can sell common shares at $30 per share and can obtain debt funding at 8 percent. It has a marginal income tax rate of 25 percent. The yield on US Treasury securities is 3 percent. The market risk premium is 6.0 percent, and the firm's beta is 0.9. It has a targeted debt-to-equity ratio of 1:1. What is its after-tax cost of debt? Maximum number of characters (including HTML tags added by text editor): 32,000 Show Rich-Text Editor (and character count)
Altamonte Telecommunications has a target capital structure that consist of 70% debt and 30% equity. The company anticipates that its capital budget for the upcoming year will be $2,000,000. If Altamonte reports net income of $1,100,000 end it follows a residual, dividend, payout policy, what will be its dividend payout ratio? Round your answer to two decimal places.
A company is considering its optimal capital structure. The firm currently has 1 million shares outstanding at $ 20 per share (tax rate = 40%) and a debt balance of $5 million. Currently, its (levered) beta is 1.5 and its ERP is 5.5%. The current risk-free rate is 5%. Your research indicate the following ratings and pre-tax cost of debt across the different debt ratios: D/(D+E) Rating Pre-tax cost of debt 0% AAA 10% 10% AA 10.5% 20% A 11% 30% BBB 12% 40% BB 13% 50% B 14% 60% CCC 16% 70% CC 18% 80% C 20% 90% D 25% a. Using the optimal WACC approach, what is the firm's optimal debt ratio? b. Calculate the company's unlevered value, assuming that the probability of default is 5% and the company loses 30% of its value in the event of a default.
Crane Sporting is a listed company in New York. Its current before-interest, after-tax operating cash flow is $200 million. The cash flows are expected to grow at 8% per annum over the next three years, after which the growth will fall to 3% per annum and stay at this rate forever. The following information is also available: Tax rate 30% Risk-free rate 5% Market return 15% Equity beta 2 Cost of debt 10% D/E 60% question Using the “free cash flow” methodology, the value of Crane Sporting is closest to: A. $1,531 million B. $1,072 million C. $717 million D. None of the above
New Energy’s capital structure today is $1,347 million in Long Term Debt and $1,655 million in Common Equity. If its debt were issued today, New Energy would pay an interest rate of 8.2%/year (before tax). New Energy’s Cost of Equity is estimated to be 12%/year. Given a tax rate of 30%, what is New Energy’s Weighted Average Cost of Capital (WACC)? (Your answer should be a % carried to 2 places.)
a firm has a debt-to-equity ratio of 1.0. if we assume that the firm's debt pays 11% interest annualy, the equity has a 19% annual return, and the tax rate is 40%, then what is the firms WACC?
Your company is financed 20% with riskless debt with a yield of 6% and 80% with equity with a cost of 14%. The corporate tax rate is 30%. a. What is the company's WACC at its existing capital structure? b. What would be the new WACC if it changes to being 40% debt financed?

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