Suppose Goodyear Tire and Rubber Company has an equity cost of capital of 7.6%, a debt cost of capital of 6.1%, a marginal corporate tax rate of 21%, and a debt-equity ratio of 2.8. Assume that Goodyear maintains a constant debt-equity ratio. a. What is Goodyear's WACC? b. What is Goodyear's unlevered cost of capital? c. Explain, intuitively, why Goodyear's unlevered cost of capital is less than its equity cost of capital and higher than its WACC. a. What is Goodyear's WACC? The WACC is%. (Round to two decimal places.) IXE
Q: H5. Which of the following is not a criteria that's used to pick your trading comparables?…
A: we will discuss the criteria used to select trading comparables for financial analysis and identify…
Q: A manager must decide how many machines of a certain type to purchase. Each machine can process 100…
A: Breakeven point refers to the position or no. of sales where the cost is equal to the contribution…
Q: You plan to buy a new car in three years and begin depositing $250 per month into a savings account…
A: Future Value (FV) is a financial concept that represents the projected worth of a sum of money at a…
Q: Keyser Mining is considering a project that will require the purchase of $479,000 of equipment. The…
A: value of the depreciation tax shield = Depreciation expense * tax rateIn case of straight line…
Q: Assume the following ratios are constant: Total asset turnover Profit margin Equity multiplier…
A: As per DuPont equation, the return on equity is
Q: Coca-Cola's worldwide sales as of December 31, 2011, was 26.7 billion cases. Assume the following…
A: Worldwide sales in 2011 = $26.7 billion Growth rate = 10.26%The sales in Spain in 2011 was The sales…
Q: stock has a spot price of $35. Its May options are about to expire. One of its puts is worth $5 and…
A: Options are derivative products that means these derive value from underlying assets and gives…
Q: You invest $1500 today and another $2000 18-months from today in a fund earning j4 = 8% for the…
A: Future Value (FV) is a financial concept that represents the projected worth of a sum of money at a…
Q: what is the present value of the firm's growth opportunities? Round your answer to the nearest…
A: Payout ratio = 0.70Earnings per share = $6.01Expected return = 8%Required rate of return = 13%
Q: ou are evaluating a project that costs $75,000 today. The project has an inflow of $160,000 in one…
A: To calculate the Internal Rate of Return (IRR) for the project, you need to find the discount rate…
Q: Tech Supplies Company, Incorporated, is a leading retailer specializing in consumer electronics. A…
A: Inventory = $5,066Total current assets = $8,851Total current liabilities = $9,175Long-term…
Q: A forward contract for 4 months is entered into when a stock index is at 1000. If the risk free…
A: F = S * e(r - q)tWhere:F is the future priceS is the spot pricer is the risk-free interest rateq is…
Q: 10. Company Z's earnings and dividends per share are expected to grow indefinitely by 5% a year. If…
A: The present value of growth opportunities can be calculated using this formula,
Q: For each of the following situations involving single amounts, solve for the unknown. Assume that…
A: Present value:The present value is calculated using the different components like interest rate,…
Q: Michael and Ava want to know how much it will cost to put their daughter Lily through college. She…
A: Present value is the equivalent value of money needed today That is equivalent to future money…
Q: Suppose I want to be able to withdraw $5,000 at the end of five years and withdraw $6,000 at the end…
A: Amount of withdrawings at the end of 5 years = $5,000Amount of withdrawings at the end of 6 years =…
Q: When should you use Power BI Services?
A: While a) When you want to clean, shape, and transform data is true to some extent, Power Pivot…
Q: Justin Lieberman must earn a minimum rate of return of 17.17% as compensation for the risk of the…
A: Internal rate of return is a discount rate that equates the NPV of an investment opportunity to…
Q: nsider a situation in which you borrow 5000$. You will repay the loan in five equal ends of year…
A: Loans are paid by the equal periodic payments and these periodic payments carry payment for interest…
Q: Tanaka Machine Shop is considering a 4-year project to improve its production efficiency Buying a…
A: The net present value is the difference between the present value of the future cash flows and the…
Q: Components of the cost of risk do not include: A-- the cost of issuing bonds B-- the cost of loss…
A: We will explore the components of the cost of risk and identify which option is not included in…
Q: You borrowed $343,191.15 14 years ago. The loan is structured as an amortized loan. The interest…
A: Loan amortization refers to the process of gradually paying off a debt, typically a loan, through a…
Q: You are looking at a one-year loan of $10,000. The Interest rate is quoted as 9.7 percent plus two…
A: Here loan amount = $10000Rate of interest = 9.7%So total loan repayment amount = 10000 * (1+9.7%) =…
Q: CMS Corporation's balance sheet as of today is as follows: Long-term debt (bonds, at par) Preferred…
A: In order to determine the current market value of the firm's debt, we need to arrive at the current…
Q: You to plan to borrow at 35000 at a 7.5 annual interest rate. The terms require you to authorize the…
A: To calculate the interest paid in year 2 of the loan, we can use the formula for calculating the…
Q: Starset Machine Shop is considering a 4-year project to improve its production efficiency. Buying a…
A: The net present value is the difference between the present value of the cash flows and the initial…
Q: Synovec Company is growing quickly. Dividends are expected to grow at a rate of 20 percent for the…
A: The dividend discount model will be used here. As per the dividend discount model the value of a…
Q: What is the value today of $1,200 per year, at a discount rate of 9 percent, if the first payment is…
A: The concept of time value of money will be used here. Value today refers to present value. The cash…
Q: Johnson's Nursery has net income of $42,500, depreciation expense of $2,500, interest expense of…
A: Free Cash Flow (FCF) is a financial metric that represents the cash a company generates from its…
Q: wu would like to start saving for retirement. Assuming you are now 20 years old and want to retire…
A: The future value function or concept can be used to determine the future value of a present sum or…
Q: Gronseth Drywall Systems, Inc., is in discussions with its investment bankers regarding the issuance…
A: Bonds are paid coupon every period and par value is paid on the maturity of the bond period.
Q: Time value of money calculations can be solved using a mathematical equation, a financial…
A: To calculate the future value of an annuity due, you can use the following formula:FV = PMT x {[(1 +…
Q: Discrimination in the labor market The following table lists the name, gender, height, and minimum…
A: In the given question the 5 lowest minimum wage is for Sam,Hilari,Maria,Edison,KevinS.noNameMinimum…
Q: Year 2012 2013 2014 2015 2016 Equity Fund (%) -7.1 -13.5 5.5 6.5 7.4 Bond Fund (%) 0.9 1.3 2.4 2.7…
A: Here, YearEquity fund (%)Bond Fund…
Q: Suppose you (U.S. investor) purchase a 5-year, AA-rated Euro bond for par that is paying an annual…
A: The Bond Foreign Exchange Market, often referred to as the Forex or FX market, is a global…
Q: Your firm has an ROE of 12.1%, a payout ratio of 21%, $632,800 of stockholders' equity, and $425,900…
A: Sustainable growth rate is the growth rate at which a company can grow if its current capital…
Q: CHALLENGE Walker's Gunnery, a small arms manufacturer, has current sales of $10 million and…
A: Financial structure, in the context of a business or organization, refers to the mix of different…
Q: End of Year 1 2 3 4 5 6 7 8 A $13,000 13,000 13,000 13,000 13,000 Investment B $13,000 13,000 13,000…
A: Present Value refers to the value of cash flows today which is to be received at some future time…
Q: Which of the following statement is FALSE? O AVC fund has an infinite lifetime and keeps its…
A: Venture capital (VC) firms are financial institutions that invest in early-stage and high-potential…
Q: The mortgage on your house is five years old. It required monthly payments of $1402, had an original…
A: “Hi There, thanks for posting the question. But as per Q&A guidelines, we must answer the first…
Q: An investor has two binds in his portfolio that have a face value of $1,000 and pay a 10% annual…
A: Bond price change to yield refers to the inverse relationship between the price of a bond and its…
Q: Consider projects Alpha and Beta: Cash Flows ($) C₁ Co C₂ Project Alpha -385,000 246,000 272,995 22…
A: IRR stands for the annualized rate of return at which the total net present value (NPV) of a project…
Q: Malaysian Island Resort. Theresa Nunn is planning a 30-day vacation on Pulau Penang, Malaysia, one…
A: The exchange rate is a variable that compares one currency's worthiness to another. It is measured…
Q: y a new car in three years and begin depositing $250 per month into a savings account that earns…
A: Future Value (FV) is a financial concept that represents the projected worth of a sum of money at a…
Q: When should you use Power Pivot?
A: While a) When you want to clean, shape, and transform data is true to some extent, Power Pivot…
Q: The six-month zero rate is 8% per annum with semiannual compounding. The price of a one-year bond…
A: To find the one-year continuously compounded zero rate, you can use the information provided about…
Q: Calculate the after-tax cost of debt for a Clinic, a for-profit healthcare provider, assuming that…
A: After Tax Cost of Debt = Cost of Debt before Tax * (1 - Tax Rate)
Q: State of the Economy Probability Steady 20% 45% 35% Recession Expansion Ratum in state 3% 15% Table…
A: The expected return of a stock is the sum of the product of return of each state of economy with the…
Q: ssume you purchased the right to sell 2,000 shares of Target stock in February 2022 at a strike…
A: Put options gives opportunity to sell stocks on the expiration of period but there is no obligation…
Q: Assume that you just bought a 5-year bond that pays interest annually of $80 ead year and will…
A: Yield to maturity of bond is rate of return realized on bond when bond is held till maturity and…
Step by step
Solved in 3 steps with 2 images
- Suppose Goodyear Tire and Rubber Company has an equity cost of capital of 8.1%, a debt cost of capital of 6.6%, a marginal corporate tax rate of 22%, and a debt-equity ratio of 2.5. Assume that Goodyear maintains a constant debt-equity ratio. a. What is Goodyear's WACC? b. What is Goodyear's unlevered cost of capital? c. Explain, intuitively, why Goodyear's unlevered cost of capital is less than its equity cost of capital and higher than its WACC. Question content area bottom a. What is Goodyear's WACC? The WACC is enter your response here%. (Round to two decimal places.)Suppose Goodyear Tire and Rubber Company has an equity cost of capital of 8.6%, a debt cost of capital of 7.1%, a marginal corporate tax rate of 24%, and a debt-equity ratio of 2.5. Assume that Goodyear maintains a constant debt-equity ratio. a. What is Goodyear's WACC? b. What is Goodyear's unlevered cost of capital? c. Explain, intuitively, why Goodyear's unlevered cost of capital is less than its equity cost of capital and higher than its WACC. Question content area bottom Part 1 a. What is Goodyear's WACC? The WACC is enter your response here%. (Round to two decimal places.)WHICH OF THE FOLLOWING STATEMENTS IS MOST CORRECT? A. IF A FIRM'S EXPECTED BASIC EARNING POWER (BEP) IS CONSTANT FOR ALL ITS ASSETS AND EXCEES INTEREST RATE ON ITS DEBT, THEN ADDING ASSETS FINANCING THEM WITH DEBT WILL RAISE THE FIRM'S EXPECTED RATE OF RETURN ON COMMON EQUITY (ROE)? B. THE HIGHER ITS TAX RATE, THE LOWER A FIRM'S BEP RATIO WILL BE, OTHER THINGS HELD CONSTANT. C. THE HIGHER THE INTEREST RATE ON ITS DEBT, THE LOWER THE FIRM'S BEP RATIO WILL BE, OTHER THINGS HELD CONSTANT. D. THE HIGHER ITS DEBT RATIO, THE LOWER THE FIRM'S BEP RATIO WILL BE, OTHER THINGS HELD CONSTANT. E. STATEMENT A IS FALSE, BUT B, C AND D ARE ALL TRUE.
- The activity ratios measure which of the following? Select one: O a the efficiency of the company's supply chain O b. the efficiency with which a company generates sales from its assets Oc the profitability of the company's activities Od the production efficiency of a company's fixed assets If the assumption of financial distress costs is added, then Modigliani and Miller (with taxes) predicts that the optimal capital structure is 100% debt Select one: O True O FalseCalculate the Weighted Average Cost of Capital (WACC) for McCormick and Company using the formula WACC = (WD x RD x (1-T)) + (WS x Rs) Note that -- Rs = the cost of equity Rd = the cost of debt T = the tax rate WD = Value of debt / (Value of debt plus value of equity) WS = Value of equity / (Value of debt plus value of equity) **Note that the weight of debt plus the weight of equity must total to 100%, as there are only two components in the capital structure.** In order to estimate the weights of debt and equity in the total capital structure, the CFO suggests using the book value of debt and the market value of equity. To determine the book value of debt, use data from the year end November 2019 McCormick 10-K. Look on the Balance sheet and add the following -- Short term borrowings, Current portion of long term debt, and Long term debt. To determine the market value of equity, use the following data: On March 17, 2020 the market value of equity (or "Market Cap")…Assume that there is corporate tax, but no other frictions. Based on the propositions of Modigliani and Miller, which statement is the least accurate? Oa. The weighted cost of capital decreases as the leverage ratio increases. D. The cost of debt increases as the leverage ratio increases. C. Firm value increases as the firm takes on more debts. d. The cost of equity increases as the leverage ratio increases. O e. The optimal structure is 100% debt.
- How would each of the following scenarios affect a firm's cost of debt, r d (l - t), t=tax rate; its cost of equity, rs; and its WACC? Indicate with an increase (I), a decreease (D), or no change (N) whether the factor would raise, lower, or have an indeterminate effect on the item in question. Assume for each answer that other things are held constant, even though in some instances this would probably not be true. 1) The corporate tax rate is lowered. 2) The Federal Reserve tightens credit. 3) The firm uses more debt; that is, it increases its debt ratioHow would each of the following scenarios affect a firm's cost of debt, r d (l - t), t=tax rate; its cost of equity, rs; and its WACC? Indicate with an increase (I), a decreease (D), or no change (N) whether the factor would raise, lower, or have an indeterminate effect on the item in question. Assume for each answer that other things are held constant, even though in some instances this would probably not be true. rd (1-t) rs WACC 1) The corporate tax rate is lowered. 2) The Federal Reserve tightens credit. 3) The firm uses more debt; that is, it increases its debt ratio 4) The dividend payout ratio is increased. 5) The firm expands into a risky new area. 6) Investors become more risk-averse. 7) The firm is an electric utility with a large investment innuclear plants. Several states are considering a ban on nuclear power generation.How would each of the following scenarios affect a firm's cost of debt, r d (l - t), t=tax rate; its cost of equity, rs; and its WACC? Indicate with an increase (I), a decreease (D), or no change (N) whether the factor would raise, lower, or have an indeterminate effect on the item in question. Assume for each answer that other things are held constant, even though in some instances this would probably not be true. rd (1-t) rs WACC 5) The firm expands into a risky new area. 6) Investors become more risk-averse. 7) The firm is an electric utility with a large investment innuclear plants. Several states are considering a ban on nuclear power generation.
- How would each of the following scenarios affect a firm's cost of debt, r d (l - t), t=tax rate; its cost of equity, rs; and its WACC? Indicate with an increase (I), a decreease (D), or no change (N) whether the factor would raise, lower, or have an indeterminate effect on the item in question. Assume for each answer that other things are held constant, even though in some instances this would probably not be true. rd (1-t) rs WACC 4) The dividend payout ratio is increased. 5) The firm expands into a risky new area. 6) Investors become more risk-averse. 7) The firm is an electric utility with a large investment innuclear plants. Several states are considering a ban on nuclear power generation.3) Consider a firm with capital from debt, preferred stock, and common equity in its capital structure. You are given that ra (1-T) = after-tax cost of debt, r, = cost of internal equity, and WACC = weighted average cost of capital. Which of the following statements is correct? (">" represents "greater than") A) r. > WACC > ra (1-T). B) ra (1-T) > rs > WACC. C) r. > ra (1-T) > WACC. D) WACC > rs > ra (1-T). WACKThe weighted average cost of capital for a firm: O is equivalent to the after-tax cost of the firm's outstanding debt. O is a weighted average between the cost of equity and the (after-tax) cost of debt. O is unaffected when there is any change in the corporate tax rate. O remains constant when the firm's capital structure changes.