ome excess cash it would like to invest in marketable securities for a long-term hold. Its Vice-President of Finance is considering three investments: (a) Treasury bonds at a 6 percent yield; (b) corporate bonds at a 11 percent yield; or (c) preferred stock at an 8 percent yield. Omega Corporation is in a 40 percent tax bracket and the tax rate on dividends is 10 percent a-1. Compute the aftertax yields for the three investment options. Note: Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places. a. Treasury bonds b. Corporate bonds c. Preferred stock Aftertax yields 3.60 a-2. Which one of the three investments should she select based on the aftertax yields? O Preferred stock

ome excess cash it would like to invest in marketable securities for a long-term hold. Its Vice-President of Finance is considering three investments: (a) Treasury bonds at a 6 percent yield; (b) corporate bonds at a 11 percent yield; or (c) preferred stock at an 8 percent yield. Omega Corporation is in a 40 percent tax bracket and the tax rate on dividends is 10 percent a-1. Compute the aftertax yields for the three investment options. Note: Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places. a. Treasury bonds b. Corporate bonds c. Preferred stock Aftertax yields 3.60 a-2. Which one of the three investments should she select based on the aftertax yields? O Preferred stock

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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The total market value of the common stock of Company A is $12 million, and the total value of its debt is $8 million. The treasurer estimates that the beta of the stock is currently 1.20 and that the market risk premium is 7.5%. The Treasury bill rate is 2.5%. Assume for simplicity that Company A debt is risk-free. The Company's tax rate is 28% . a) What is the pre-tax cost of capital for Company A? b) What is the WACC for Company A ?
The Omega Corporation has some excess cash it would like to invest in marketable securities for a long-term hold. Its Vice-President of Finance is considering three investments: (a) Treasury bonds at a 7 percent yield; (b) corporate bonds at a 12 percent yield; or (c) preferred stock at an 8 percent yield. Omega Corporation is in a 35 percent tax bracket and the tax rate on dividends is 20 percent.a-1. Compute the aftertax yields for the three investment options. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) After Tax Yields % a. Treasury bonds b. Corporate bonds c. Preferred Stock
(Individual or component costs of capital) Compute the cost of capital for the firm for the following a. Currently bonds with a similar credit rating and maturity as the firm's outstanding debt are selling to yield 8.84 percent while the borrowing firm's corporate tax rate is 34 percent. b. Common stock for a firm that paid a $1.02 dividend last year. The dividends are expected to grow at a rate of 4 1 percent per year into the foreseeable future. The price of this stock is now $25 56, c. A bond that has a $1,000 par value and a coupon interest rate of 11.2 percent with interest paid semiannually. A new issue would sell for $1,151 per bond and mature in 20 years. The firm's tax rate is 34 percent d. A preferred stock paying a dividend of 7.7 percent on a $107 par value. If a new issue is offered, the shares would sell for $84 71 per share a. The after-tax cost of debt debit for the firm is (Round to two decimal places)
The Omega Corporation has some excess cash it would like to invest in marketable securities for a long-term hold. Its Vice-President of Finance is considering three investments: (a) Treasury bonds at a 10 percent yield; (b) corporate bonds at a 13 percent yield; or (c) preferred stock at an 11 percent yield. Omega Corporation is in a 35 percent tax bracket and the tax rate on dividends is 20 percent. a-1. Compute the aftertax yields for the three investment options. Note: Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places. Answer is complete but not entirely correct. Aftertax yields a. Treasury bonds b. Corporate bonds c. Preferred stock 6.50 % 8.45✔ % 10.23 X % a-2. Which one of the three investments should she select based on the aftertax yields? Preferred stock O Treasury bonds O Corporate bond
A company needed ghc 1000 to finance its activities. The firm can financed this expenditure either by bonds or equity. Interest rate on bonds is 10%. The company can earn ghc 160 in good years and ghc80 in bad years. Assuming the firm faces equal probability of good and bad years; i What will be the stream of returns on both bonds and equity if the company chooses the following financing options a 100% equity financing b 50% equity financing c 20% equity financing d 0% equity financing ii Estimate the equity risk associated with each option in (i) iii As an investor who wants to purchase a share in the company, which financing option will make you purchase the stock. Why????
You have been tasked with the responsibility of calculating the WACC for Meeks Investments Limited and Hall Developments Limited. The risk-free rate is currently 4% and the market risk premium is 6.5%. The details for both companies are presented in the table below. The tax rate is 25%. Meeks Investments Limited Hall Developments Limited Value of Common Equity $1,500,000 $3,000,000 Beta 2.18 1.52 Value of Preferred Equity $1,000,000 $500,000 Preferred Dividends $4.50 $7.60 Price of Preferred Stock $60 $80 Price of Bonds $970 $1,160 Coupon Rate (Paid semi-annually) 8% 11% Par Value of Bonds $1,000 $1,000 Years to Maturity 8 12 Value of Debt $2,500,000 $1,500,000 Use the information in the table above to calculate the WACC for both companies.
The total market value of the common stock of the Okefenokee Real Estate Company is $8 million, and the total value of its debt is $4 million. The treasurer estimates that the beta of the stock is currently 1.5 and that the expected risk premium on the market is 6%. The Treasury bill rate is 2%. Assume for simplicity that Okefenokee debt is risk-free and the company does not pay tax. Suppose the company wants to diversify into the manufacture of rose-colored spectacles. The beta of unleveraged optical manufacturers is 2. Estimate the required return on Okefenokee's new venture. (If you cannot find your answer in the choices below, please choose the choice that is closest to your answer) Group of answer choices 10% 10.9% 9.4% 8.9% 8.5%
The company you work for wants you to estimate the company’s WACC; but before you do so, you need to estimate the cost of debt and equity. You have obtained the following info. 1) the firms non-callable bonds mature in 20 years, have an 8.00% annual coupon, a par value of $1,000 and a market price of $1,225.00. 2) the company’s tax rate is 40%. 3)the risk-free rate is 4.50%, the market risk premium is 5.50%, and the stocks beta is 1.20. 4) the target capital structure consists of 35% debt and the balance is common equity. The firm uses the CAPM to estimate the cost of equity, and it does not expect to issue any common stock. WHAT is the WACC?
The company you work for wants you to estimate the company’s WACC; but before you do so, you need to estimate the cost of debt and equity. You have obtained the following info. 1) the firms non-callable bonds mature in 20 years, have an 8.00% annual coupon, a par value of $1,000 and a market price of $1,225.00. 2) the company’s tax rate is 40%. 3) the risk-free rate is 4.50%, the market risk premium 5.50%, and the stocks betta is 1.20. 4) the target capital structure consists of 35% debt and the balance is common equity. The firm uses the CAPM to estimate the cost of equity, and it does not expect to issue any common stock. Calculate the company’s component cost of debt.
Assume that you were recently hired as assistant to Jerry Lehman, financial VP of Coleman Technologies. Your first task is to estimate Coleman’s cost of capital. Lehman has provided you with the following data, which he believes is relevant to your task: Questions: The firm’s marginal tax rate is 40%. The current price of Coleman’s 12 % coupon, semiannual payment, noncallable bonds with 15 years remaining to maturity is $1,153.72. Coleman does not use short-term interest-bearing debt on a permanent basis. New bonds would be privately placed with no flotation cost. The current price of the firm’s 10%, $100 par value, quarterly dividend, perpetual preferred stock is $113.10. Coleman would incur flotation costs of $2 per share on a new issue. Coleman’s common stock is currently selling at $50 per share. Its last dividend (D0) was $4.19, and dividends are expected to grow at a constant rate of 5% in the foreseeable future. Coleman’s beta is 1.2, the yield on Treasury bonds is 7%, and the…
Whispering Pines Inc. is all-equity-financed. The expected rate of return on the company's shares is 9.65%. a. What is the opportunity cost of capital for an average-risk Whispering Pines investment? (Enter your answer as a percent rounded to 2 decimal places.) Opportunity cost of capital % b. Suppose the company issues debt, repurchases shares, and moves to a 24% debt-to-value ratio (D/ V = 0.24). What will be the company's weighted-average cost of capital at the new capital structure? The borrowing rate is 5.75% and the tax rate is 21%. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Weighted-average cost of capital
The CFO of Lenox Industries hired you as a consultant to help estimate its cost of capital. You have obtained the following data: (1) rd = yield on the firm’s bonds = 7.00% and the risk premium over its own debt cost = 4.00%. (2) rRF = 5.00%, RPM = 6.00%, and b = 1.05. (3) D1 = $1.20, P0 = $35.00, and g = 8.00% (constant). You were asked to estimate the cost of equity based on the three most commonly used methods and then to indicate the difference between the highest and lowest of these estimates. What is that difference? 0.43% 0.49% 0.48% 0.38% 0.37%

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