Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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**Blue Ram Brewing Company Capital Structure Analysis**

Blue Ram Brewing Company is assessing the impact of introducing debt into its capital structure to replace some of its equity. This analysis involves estimating how different debt levels could affect the company's costs of debt and equity, as well as its weighted average cost of capital (WACC).

**Initial Conditions and Assumptions:**
- **Unlevered Beta:** 1.1
- **Cost of Equity (Unlevered):** 11.80%
- **Weighted Average Cost of Capital (Initial):** 11.80%
- **Risk-Free Rate of Interest:** 3% (\(i_{RF}\))
- **Market Risk Premium:** 8% (RP)
- **Marginal Tax Rate:** 35%

**Objective:**
To understand the financial effects of varying levels of debt on Blue Ram's capital costs and overall WACC.

**Analysis Overview:**

| **D/Cap Ratio** | **E/Cap Ratio** | **D/E Ratio** | **Bond Rating** | **Before-Tax Cost of Debt (\(r_d\))** | **Levered Beta (\(b\))** | **Cost of Equity (\(r_s\))** | **WACC** |
|-----------------|-----------------|---------------|----------------|---------------------------------------|--------------------------|------------------------------|-----------|
| 0.0             | 1.0             | 0.00          | —              | —                                     | 1.1                      | 11.80%                       | 11.80%    |
| 0.2             | 0.8             | 0.25          | A              | 8.4%                                  | —                        | 13.232%                      | 11.678%   |
| 0.4             | 0.6             | 0.67          | BBB            | 8.9%                                  | 1.577                    | 15.616%                      | 11.685%   |
| 0.6             | 0.4             | 1.50          | BB             | 11.1%                                 | 2.173                    | —                            | 12.483%   |
| 0.8             | 0.2             | —             | C              | 14.3%                                 | 3.960                    | 34.680%                      | —
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Transcribed Image Text:**Blue Ram Brewing Company Capital Structure Analysis** Blue Ram Brewing Company is assessing the impact of introducing debt into its capital structure to replace some of its equity. This analysis involves estimating how different debt levels could affect the company's costs of debt and equity, as well as its weighted average cost of capital (WACC). **Initial Conditions and Assumptions:** - **Unlevered Beta:** 1.1 - **Cost of Equity (Unlevered):** 11.80% - **Weighted Average Cost of Capital (Initial):** 11.80% - **Risk-Free Rate of Interest:** 3% (\(i_{RF}\)) - **Market Risk Premium:** 8% (RP) - **Marginal Tax Rate:** 35% **Objective:** To understand the financial effects of varying levels of debt on Blue Ram's capital costs and overall WACC. **Analysis Overview:** | **D/Cap Ratio** | **E/Cap Ratio** | **D/E Ratio** | **Bond Rating** | **Before-Tax Cost of Debt (\(r_d\))** | **Levered Beta (\(b\))** | **Cost of Equity (\(r_s\))** | **WACC** | |-----------------|-----------------|---------------|----------------|---------------------------------------|--------------------------|------------------------------|-----------| | 0.0 | 1.0 | 0.00 | — | — | 1.1 | 11.80% | 11.80% | | 0.2 | 0.8 | 0.25 | A | 8.4% | — | 13.232% | 11.678% | | 0.4 | 0.6 | 0.67 | BBB | 8.9% | 1.577 | 15.616% | 11.685% | | 0.6 | 0.4 | 1.50 | BB | 11.1% | 2.173 | — | 12.483% | | 0.8 | 0.2 | — | C | 14.3% | 3.960 | 34.680% | —
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