The market value of Company A's common stock is $25 million, and the market value of its risk-free debt is $10 million. The beta of the company's common stock is 1.3, and the market expected return is 10 per cent. If the Treasury bill rate is 4 per cent, what is the company's cost of capital? (Assume no taxes.) O a. 9.6 per cent O b. 15.8 per cent c. None of these options O d. 11.8 per cent

The market value of Company A's common stock is $25 million, and the market value of its risk-free debt is $10 million. The beta of the company's common stock is 1.3, and the market expected return is 10 per cent. If the Treasury bill rate is 4 per cent, what is the company's cost of capital? (Assume no taxes.) O a. 9.6 per cent O b. 15.8 per cent c. None of these options O d. 11.8 per cent

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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Problem 3.1. Assume CAPM. Assume that the risk-free interest rate equals 0.03 and that the market retur equals 0.08. Consider a company which currently has 2 million shares outsanding with the stock price of $20 per share. The equity rate is 0.09. The company has ten million dollars in debt with the debt beta equal to 0.4. The weighted average cost of capital is 0.0796. Calculate the capital tax rate.
5. SIROM Scientific Solutions has £12 million of outstanding equity and £4 million of bank debt. The bank debt costs 4% per year. The estimated equity beta is 1. If the market risk premium is 8% and the risk-free rate is 4%, calculate the weighted average cost of capital if the firm's tax rate is 30%. A. 8.73% B. 9.22% C. 9.70% D. 10.67%
MM Ferguson's market value of common stock is $35.4 million, and its risk-free debt is $13.1 million in market value. The beta of the company's common stock is 1.55, and the market return is 10.2 percent. If the Treasury bill rate is 1.7 percent, what is the company's cost of capital? (Ignore taxes) A. 10.66% B. 11.32% C. 12.49% D. 13.31% E. 13.92%
6. Jemisen's has expected earnings before interest and taxes of £6,200. Its unlevered cost of capital is 13 per cent and its tax rate is 34 per cent. The firm has debt with both a book and a market value of £2,500. This debt has a 9 per cent coupon and pays interest annually. What is the firm's weighted average cost of capital? A. 12.48 per cent B. 12.66 per cent C. 13.87 per cent D. 14.14 per cent
Consider a two-date binomial model. A company has both debt and equity in its capital structure. The value of the company is 100 at Date 0. At Date 1, it is equally like that the value of the company increases by 20% or decreases by 10%. The total promised amount to the debtholders is 100 at Date 1. The riskfree interest rate is 10%. a. What is the value of the debt at Date 0? What is the value of the equity at Date 0? b. Suppose the government announces that it guarantees the company’s payment to the debtholders. How much is the government guarantee worth?
The market value of Stan Company's equity is P15 million, and the market value of its risk free debt is P5 million. If the required rate of return on the equity is 20% and that on the debt is 8%, calculate the company's cost of capital. (Assume no taxes.) (round your answer to the nearest whole number)
Give typing answer with explanation and conclusion A company has an expected EBIT of $18,000 in perpetuity, a tax rate of 35%, and a debt-to- equity ratio of 0.75. The interest rate on the debt is 9.5%. The firm’s WACC is 9%. a) If the company has not debt, what would be the unlevered cost of capital and firm value? b) Suppose now the company has $55,714.29 in outstanding debt. Using your answer to part a) and M&M Proposition I with taxes, what is the value of this levered firm?
Abacus Company has 30% debt and 70% equity. The borrowing rate is 12%. (1) If you own 5% of the stock of Abacus, what is your dollar return if the overall capitalization rate, Ko, is 20%? (2) What is the implied required rate of return on equity if the total value of the firm is 1,500,000? Select one: a. None of the other three answers b. Dollar return=246000. c. Dollar return3D12300. d. Dollar return=54000.
The current value of a firm is $1,400. Te firm has $1,000 in pure debt due in one year and the risk-free rate is 6%. The firm's asset will be worth either $1,200 or $1,500 in one year. What is the interest rate on the debt? A. 6.0% B. 7.0% C. 7.5% D. 11.0% E. 13.0%
Question 01: Base Plastics Inc. has a B of 0.90. If the government treasury-bils are giving a return of 3%; and if the market is giving a returm of 9%, what is the expected rate of return on Base Plastics' shares? Question 02: You have invested $36,000 in a project. The expected year end cash flows are $15,000; $11,000; $12,000, and $14,000. The discount rate is 9%. a. Calculate the payback period b. Calculate the discounted payback period
Consider a two-date binomial model. A company has both debt and equity in its capital structure. The value of the company is 100 at Date 0. At Date 1, it is equally like that the value of the company increases by 20% or decreases by 10%. The total promised amount to the debtholders is 100 at Date 1. The riskfree interest rate is 10%. a. What are the possible payoffs to the equityholders at date 1? What kind of financial product has the same payoffs? Please describe the detailed characteristics of the financial product. b. What are the possible payoffs to the bondholders at date 1? Are they riskfree? What kind of financial product/portfolio has the same payoffs? Please describe the detailed characteristics of the financial product/portfolio.
17) The market value of Charcoal Corporation's common stock is $20 million, and the market value of its risk-free debt is $5 million. The beta of the company's common stock is 1.25, and the market risk premium is 8 percent. If the Treasury bill rate is 5 percent, what is the company's cost of capital? (Assume no taxes.) A) 15.0 percent B) 14.6 percent C) 13.0 percent D) 7.0 percent

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