Omega Corporation has 10.5 million shares outstanding, now trading at $60 per share. The firm has estimated the expected rate ofreturn to shareholders at about 10%. It has also issued long-term bonds at an interest rate of 7% and has a debt value of $225 million. Itpays tax at a marginal rate of 21%.a. What is Omega's after-tax WACC?b. What would WACC be if Omega had not to pay taxes and the expected rate of return to shareholders were unchanged?Note: For all requirements, do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimalplaces.a. After-tax WACCb. WACC%%

Step 1: Given Value for Calculation Number of Equity = n = 10.5 millionPrice per equity = pe =…

Answered: Omega Corporation has 10.5 million…

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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Hawar International is a shipping firm with a current share price of $4.94 and 9.8 million shares outstanding. Suppose that Hawar announces plans to lower its corporate taxes by borrowing $8.7 million and repurchasing shares, that Hawar pays a corporate tax rate of 25%, and that shareholders expect the change in debt to be permanent. a. If the only imperfection is corporate taxes, what will be the share price after this announcement? b. Suppose the only imperfections are corporate taxes and financial distress costs. If the share price rises to $4.99 after this announcement, what is the PV of financial distress costs Hawar will incur as the result of this new debt? a. If the only imperfection is corporate taxes, what will be the share price after this announcement? The share price after this announcement will be $ per share. (Round to the nearest cent.) b. Suppose the only imperfections are corporate taxes and financial distress costs. If the share price rises to $4.99 after this…
Refi Corporation is planning to repurchase part of its common stock by issuing corporate debt. As a result, the firm’s debt-equity ratio is expected to rise from 30 percent to 50 percent. The firm currently has $2.7 million worth of debt outstanding. The cost of this debt is 9 percent per year. The firm expects to have an EBIT of $1.26 million per year in perpetuity and pays no taxes. a. What is the market value of the firm before and after the repurchase announcement? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.) b. What is the expected return on the firm’s equity before the announcement of the stock repurchase plan? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c. What is the expected return on the equity of an otherwise identical all-equity firm? (Do not round intermediate calculations and…
Omega Corporation has 10 million shares outstanding, now trading at $55 per share. The firm has estimated the expected rate of return to shareholders at about 12%. It has also issued $200 million of long-term bonds at an interest rate of 7%. It pays tax at a marginal rate of 35%. a. What is Omega's after-tax WACC? b. How much higher would WACC be if Omega used no debt at all? (Hint: For this problem you can assume that the firm's overall beta [BA] is not affected by its capital structure or by the taxes saved because debt interest is tax-deductible.)
Purple Inc. has 10 million shares outstanding, now trading at £75 per share. It has also issued £200 million long-term bonds at an interest rate of 8 percent. The firm estimated the expected rate of return for shareholders to be 20 percent in the levered company. a) If there is no corporate tax applicable to this company, what is Purple Inc.’s WACC? b) Now assume Purple Inc. pays tax at a marginal rate of 35 percent. What is the company’s after-tax WACC? c) How much higher would the WACC be if the company used no debt at all? (For this problem you can assume that the firm’s overall asset return is not affected by its capital structure or by interest tax shields).
1. Soda Fizz has debt outstanding that has a market value of $3 million. The company's stock has a book value of $2 million and a market value of $6 million. What are the weights in SodaFizz's capital structure? 2. The yield to maturity on Soda Fizz's debt is 7.2%. If the company's marginal tax rate is 21%, what is Soda Fizz's effective cost of debt? 3. SodaFizz paid a dividend of $2 per share last year; its dividend has been growing at a rate of 2% per year, and that growth rate is expected to continue into the future. The stock of SodaFizz is currently trading at $19.50 per share. According to the constant dividend growth model, what is the cost of equity capital for Soda Fizz? 5. Given the answers to Problems 1, 2, and 3, what is SodaFizz's WACC when the constant dividend growth model is used to calculate its equity cost of capital?
Refi Corporation is planning to repurchase part of its common stock by issuing corporate debt. As a result, the firm’s debt-equity ratio is expected to rise from 35 percent to 50 percent. The firm currently has $3.1 million worth of debt outstanding. The cost of this debt is 8 percent per year. The firm expects to have an EBIT of $1.3 million per year in perpetuity and pays no taxes. a. What is the market value of the firm before and after the repurchase announcement? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.) b. What is the expected return on the firm’s equity before the announcement of the stock repurchase plan? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c. What is the expected return on the equity of an otherwise identical all-equity firm? (Do not round intermediate calculations and…
Hawar International is a shipping firm with a current share price of $4.50 and 10 million shares outstanding. Suppose Hawar announces plans to lower its corporate taxes by borrowing $10 million and repurchasing shares. a. With perfect capital markets, what will the share price be after this announcement? b. Suppose that Hawar pays a corporate tax rate of 40%, and that shareholders expect the change in debt to be permanent. If the only imperfection is corporate taxes, what will the share price be after this announcement? c. Suppose the only imperfections are corporate taxes and financial distress costs. If the share price rises to $4.55 after this announcement, what is the PV of financial distress costs Hawar will incur as the result of this new debt? Question content area bottom Part 1 a. With perfect capital markets, what will the share price be after this announcement? With perfect capital markets, the share price will be $enter your response here per share
Caligula Corp. has 870,000 shares outstanding, currently trading at $48. The company is borrowing $3,200,000 to buy back some shares. The interest rate is 9%. Assume that the buy-back does not affect the stock price. What is the break-even EBIT if there are no taxes? What is the break-even EBIT if the tax rate is 34%?
Use the following information:Debt: $79,000,000 book value outstanding. The debt is trading at 94% of book value. Theyield to maturity is 7%.Equity: 2,900,000 shares selling at $46 per share. Assume the expected rate of return onFederate d’s stock is 16%.Taxes: Federate d’s marginal tax rate is Tc = 0.21.Suppose Federated Junkyards decides to move to a more conservative debt policy. A yearlater, its debt ratio is down to 14.00% (D/V = 0.1400). The interest rate has dropped to6.6%. The company’s business risk, opportunity cost of capital, and tax rate have notchanged. Use the three-step procedure to calculate Federate d’s WACC under these newassumptions.
QuestionTireless Wheels Limited has no debt financing and has a value of $60 million and EBIT of $25 million. The firm is planning to change its capital structure by issuing $30 million in debt, and repurchasing requisite number of shares. The firm is estimated to pay 8 percent on interest expense. Its income is taxed at a per annum rate of 30%.a) What is the firm’s unlevered cost of equity?b) What is the firm’s levered cost of equity?c) What will be the firm’s WACC after the recapitalization?d) What change do you observe in the firm’s WACC before and after recapitalization? Why?
BBA Ltd has just issued $10 million in debt (at par or face value). The firm will pay interest only on this debt. BBA’s marginal tax rate is expected to be 30% for the foreseeable future. a) Suppose BBA pays interest of 6% per year on its debt. What is its annual interest tax shield? b) What is the present value of the interest tax shield, assuming the tax shield’s risk is the same as that of the loan? c) Suppose instead that the interest rate on the debt is 5%. What is the present value of the interest tax shield in this case? Ten years have passed since BBA issued $10 million in perpetual interest-only debt with a 6% annual coupon. Tax rates have remained the same at 30% but interest rates have dropped so BBA’s current cost of debt capital is 4%. d) What is BBA’s annual interest tax shield now? e) What is the present value of the interest tax shield now?
Please show the solution. Thank you. 1. The market value of Bato Company’s ordinary shares (book value: P65M) is estimated at P60M and the market value of its interest bearing debt (book value: P35M) is estimated at P40M. The average before tax yield on these liabilities is 15% per year. Income taxes are 40%. The company is expected to pay a dividend of P10 per share and the shares are selling at a price of P100 per share. The growth rate of dividend is projected to be 2.5% per year. What is the weighted average cost of capital (WACC) of the company as a whole?

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