Weighted Average Cost of CapitalScenario ChangesCost of Capital ComponentsCapital Structure ComponentsExpectedReturn ofWACCRisk FreePre-TaxDebt CostBetaBondShort-Term Long-TermTax RateTotalRateEquityMarketRatingDebtDebtCapitalTargetDisneySix Flags0.9510.4%3.1%12.0%3.3%A157,2155,99217,681180,8889.0%0.9110.4%3.1%21.3%5.9%BB5,8922,0637,9558.1%Fed Rate MoveDisneySix Flags0.9510.4%3.1%12.0%3.3%A157,2155,99217,681180,8889.0%0.9110.4%3.1%21.3%5.9%BB5,89221637,9558.1%Credit Rating ChangeDisneySix Flags0.9510.4%3.1%12.0%3.3%A157,2155,99217,681180,8889.0%0.9110.4%3.1%21.3%5.9%BB5,8922,0637,9558.1%Additional Debt for Fox AcquisitionDisneySix Flags0.9510.4%3.1%12.0%3.3%A157,2155,99217,681180,8889.0%0.9110.4%3.1%21.3%5.9%BB5,8922,0637,9558.1%Bear Stock MarketA157,2155,99217,681180,8889.0%DisneySix Flags0.9510.4%3.1%12.0%3.3%0.9110.4%3.1%21.3%5.9%BB5,8922,0637,9558.1%Tax Rate IncreasesDisney0.9510.4%3.1%12.0%3.3%A157,2155,99217,681180,8889.0%Six Flags10.4%21.3%5.9%BB5,8922,0637,9558.1%0.913.1% 3. How may Disney's WACC be impacted by stated changesin its operating environment. Consider the following scenar-ios:1. an increase in the Federal Reserve reference rate;2. a two notch downgrade in Disney's credit rating;3. adding debt to Disney's capital structure for an acquisition;4. a downturn in the US equity market; and,5. an increase in Disney's marginal income tax rate?

Weighted Average Cost of Capital (WACC) The calculation of weighted average cost of capital which…

How may Disney's WACC be impacted by stated changes in its operating environment. Consider the following scenar- ios: 1. an increase in the Federal Reserve reference rate; 2. a two notch downgrade in Disney's credit rating; 3. adding debt to Disney's capital structure for an acquisition; 4. a downturn in the US equity market; and, 5. an increase in Disney's marginal income tax rate?

How may Disney's WACC be impacted by stated changes in its operating environment. Consider the following scenar- ios: 1. an increase in the Federal Reserve reference rate; 2. a two notch downgrade in Disney's credit rating; 3. adding debt to Disney's capital structure for an acquisition; 4. a downturn in the US equity market; and, 5. an increase in Disney's marginal income tax rate?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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B.F. Pierce & Company is considering changing its capital structure. The company currently has no debt and no preferred stock, but it would like to add some debt to take advantage of low interest rates and the tax shield. Its investment banker has indicated that the pre-tax cost of debt under various possible capital structures would be as follows: 8.66% 9.21% 8.83% Market Debt-to- Value Ratio 9.07% (WD) 0.00 0.20 0.40 0.60 0.80 Market Equity-to- Value Ratio (WE) 1.00 0.80 0.60 0.40 0.20 Market Debt-to- Equity Ratio (D/E) 0.00 0.25 0.67 1.50 4.00 Before-Tax Cost of Debt (rD) 5.00% The company uses the CAPM to estimate its cost of common equity. Currently the risk-free rate is 4%, the market risk premium is 6%, and the company's tax rate is 25%. The company estimates that its beta now (which is unlevered because it currently has no debt) is 0.8. Based on this information, what is the firm's weighted average cost of capital at its optimal capital structure? 6.00% 7.00% 8.00% 9.00%
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am. 167.
The total in rate sensitive assets for a financial institution is $120 million and the total in rate sensitive liabilities is $95 million. What is the cumulative pricing gap (CGAP) and what is the interest rate sensitivity gap ratio if total assets equals $195 million? What would the projected change to net income be if interest rates rose by 2% on both assets and liabilities? What would the projected change to net income be if interest rates declined by 2% on both assets and liabilities? What would the projected change to net income be if interest rates rose by 1.8% on assets and 1.5% on liabilities? What would the projected change to net income be if interest rates declined by 1.8% on assets and 1.5% on liabilities?
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F. Pierce Products Inc. is considering changing its capital structure. F. Pierce currently has no debt and no preferred stock, but it would like to add some debt to take advantage of the tax shield. Its investment banker has indicated that the pre-tax cost of debt under various possible capital structures would be as follows: Market Debt-to Equity Ratio (D/S) Before-Tax Cost of Debt (ra) Market Debt-to- Value Ratio (wd) Market Equity-to- Value Ratio (ws) 0.0 1.0 0.10 0.90 0.20 0.80 0.30 0.40 0.70 0.60 0.00 0.1111 0.2500 0.4286 0.6667 6.0% 6.4 7.0 8.2 10.0 F. Pierce uses the CAPM to estimate its cost of common equity, rs, and at the time of the analaysis the risk-free rate is 6%, the market risk premium is 7%, and the company's tax rate is 25%. F. Pierce estimates that its beta now (which is "unlevered" because it currently has no debt) is 0.7. Based on this information, what is the firm's optimal capital structure, and what would be the weighted average cost of capital at the optimal…
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