Running Shoes, Inc. has 2 million shares of stock outstanding. The stock currently sells for $15 per share.The firm's debt is publicly traded and has five years until maturity. The current value of the firm's bonds is$14.1016 million with a yield to maturity of 8%. The risk free rate is 2% and the market risk premium is9%. You've estimated that the firm has a beta of 1.7. The corporate tax rate is 30%. Hint: find the marketvalue of the debt.What percentage of Running Shoes, Inc. is financed with debt? (Answer in decimal form)

Capital structure of the company includes the debt and equity and cost of capital depends on the…

Answered: Running Shoes, Inc. has 2 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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The stock of Sonnaa Co. has a beta of 1.11. The company has an outstanding debt of 450 Cr and shareholder equity of 50, 000 Cr. Calculate business risk and financial risk for investor if the current market premium is at 12.50% the One - year government bond yield is 8.5%. (Tax rate 25%)
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Rauch Inc.’s current stock price is $2 per share and it has 300 million shares outstanding. The book value of its equity is $200 million and the book value of its debt is $400 million. Assume that the beta of the firm’s debt is 0.5 and the beta of the firm’s equity is 1.5. The risk-free rate is 3% and the expected return on the market is 9%. Assume that there are no taxes or other market imperfections. What is Rauch’s asset beta? What is Rauch’s asset cost of capital? Assume that Rauch Inc. issues an additional $100 million in debt and uses the proceeds to buy back its equity. What is Rauch’s asset beta after recapitalization? What is Rauch’s asset cost of capital after recapitalization? After the recapitalization described in part (b), Rauch’s debt beta is now 0.6. What is Rauch’s equity beta after recapitalization? What is Rauch’s cost of equity after recapitalization? From the standpoint of Rauch Inc. (i.e., the firm as a whole), what is the net present value(NPV) of the…
A firm has 2,000,000 shares of common stock outstanding with a market price of $2.00 per share. It has 2,000 bonds outstanding, each selling for $1,200. The bonds mature in 15 years, have a coupon rate of 10%, and pay coupons annually. The firm’s beta is 1.2, the risk free rate is 5%, and the market risk premium is 7%. The tax rate is 34%. Calculate the WACC.
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XYZ currently has common stock trading at $40 per share. XYZ just paid a dividend of $2.00 per share, which is expected to grow at a constant rate of 5%. XYZ's beta is 1.5, the risk-free rate is 2%, and the market return is expected to be 8%. The pre-tax yield on XYZ's bonds is 7%. XYZ's finance department believes that new stock would require a premium of 5% over their own bond yield. Flotation cost for issuing new stock is 10%. Compute the cost of new common stock using the discounted cash flow method (show your answer in percent, and to 2 decimal places. Example: 9.62%). Question 5 options:

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