None UB is examining its capital structure with the intent of arriving at an optimal debt ratio. Itcurrently has no debt and has a beta of 1.5. The riskless interest rate is 9%. Your researchindicates that the debt rating will be as follows at different debt levels: D/(D+ E) (%) RatingInterest Rate (%) 0 AAA 10 10 AA 10.5 20 A 11 30 BBB 12 40 BB 13 50 B 14 60 CCC 16 70CC 18 80 C 20 90 D 22 The firm currently has 1 million shares outstanding at $20 per share(tax rate = 40%). a. What is the firm's optimal debt ratio? b. Assuming that the firmrestructures by repurchasing stock with debt, what will the value of the stock be after therestructuring? (with 5% growth in perpetuity)

The optimal debt ratio is the one that minimizes the WACC. From the calculated values, it's…

Answered: UB is examining its capital structure…

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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Where do we generally find optimal level of debt? A. where the tax shield is maximized B. the amount of debt such that the YTM is 5.5% or less C. where debt equals equity D. whatever will yield a FICO sore of 700 or better E. consistent with a low investment grade debt rating
A financial institution uses a loan base rate of 4.35% and sets the credit risk premium at 6.68%. The institution charges a 1.5% loan origination fee and imposes 3.22% compensating balances. The required reserves for this institution are 10%. Additionally suppose your institution specifies the following linear probability model to estimate the probability of default: PD=80-8₁ Wealth - B₂Credit Score + B3 Number of Bankruptcies Bo= 10, 109.5 8₁0.10 B₂ = 0.20 B3 = 0.60 Use the information above to answer the question. What is the gross rate of return on the loan? O 9.31% O 11.03% O 12.53% 12.90%
You have the following initial information on which to base your calculations and discussion: Debt yield = 2.5% Required Rate of Return on Equity = 13% Expected return on S&P500 = 8% Risk-free rate (rF) = 1.5% Inflation = 2.5% Corporate tax rate (TC) = 30% Current long-term and target debt-equity ratio (D:E) = 1:3 a. What is the unlevered cost of equity (rE*) for this firm? Assume that the management of the firm is considering a leveraged buyout of the above company. They believe that they can gear the company to a higher level due to their ability to extract efficiencies from the firm’s operations. Thus, they wish to use a target debt-equity ratio of 3:1 in their valuation calculations. b. What would the levered cost of equity equal for this firm at a debt-equity ratio (D:E) of 3:1? c. What would the required rate of return for the company equal if it were to be acquired under the leveraged buyout structure (i.e., what would the estimated firm WACC equal to under a…
You have the following initial information on which to base your calculations and discussion: Debt yield = 2.5% Required Rate of Return on Equity = 13% Expected return on S&P500 = 8% Risk-free rate (rF) = 1.5% Inflation = 2.5% Corporate tax rate (TC) = 30% Current long-term and target debt-equity ratio (D:E) = 1:3 a. What is the unlevered cost of equity (rE*) for this firm? Assume that the management of the firm is considering a leveraged buyout of the above company. They believe that they can gear the company to a higher level due to their ability to extract efficiencies from the firm’s operations. Thus, they wish to use a target debt-equity ratio of 3:1 in their valuation calculations.
A financial institution uses a loan base rate of 4.35% and sets the credit risk premium at 6.68%. The institution charges a 1.5% loan origination fee and imposes 3.22 % compensating balances. The required reserves for this institution are 10%. Additionally suppose your institution specifies the following linear probability model to estimate the probability of default: PD = Bo - Bi Wealth-B2Credit Score + B3 Number of Bankruptcics Bo = 10, 109.5 %3D B1 = 0.10 %3D B2 = 0.20 %3D B3 = 0.60 %3D Use the information above to answer the question. What is the gross rate of return on the loan? O 9.31% O 11.03% O 12.53% O 12.90%
Suppose that the borrowing rate that your client faces is 5%. Assume that the equity market index has an expected return of 8% and standard deviation of 24%, that r = 28. What is the range of risk aversion for which a client will neither borrow nor lend, that is, for which y=1? Note: Do not round intermediate calculations. Round your answers to 2 decimal places. y = 1 for 9.60 SAS 0.48
B Use the following information to answer the question(s) below. Nielson Motors has a debt-equity ratio of 1.6, an equity beta of 1.6, and a debt beta of 0.5. It is currently evaluating the following projects, none of which would change Nielson's volatility. Project 1 Investment 100 NPV 23 4 5 2 3 75 120 60 80 12 18 15 14 (All amounts are in Smillions.) The total debt overhang associated with accepting project 1 is closest to ($ million) (2 decimal places):
Dhofar Energy Services has a Beta = 1.68 The risk-free rate on a treasury bill is currently 4.4% and the cost of equity has 20.70%. What is the market return? Select one: a. 0.1410 b. 1.0970 c. All the given choices are not correct d. 0.1654 e. 0.2369
Use the following information to answer the question(s) below. Nielson Motors has a debt-equity ratio of 1.8, an equity beta of 2, and a debt beta of 0.2. It is currently evaluating the following projects, none of which would change Nielson's volatility. Project 1 4 2 3 75 120 60 Investment 100 NPV 23 12 (All amounts are in $millions.) 5 80 18. 15 14 Nielson Motors should accept those projects with profitability indices greater than (2 decimal places):
Which of the following statements is false? A. Basel II use the value at risk (VaR) with a one-year time horizon and a 99.9% confidence level for calculating capital for credit risk and operational risk. B. 20 BP = 0.2% C. Basel I is increasing the amount of capital that banks are required to hold and the proportion of that capital that must be equity. D. Model-building approach is a model for the joint distribution of changes in market variables and using historical data to estimate the model parameters.
13. Suppose that an FI holds two loans with the following characteristics. Annual Spread between Loan Rate and FI's Cost of Funds Loan X₁ 0.45 0.55 1 2 5.5% 3.5 Annual Fees 2.25% 1.75 Loss to Fl Expected Given Default Default Frequency 30% 20 3.5% 1.0 P12 = -0.15 Calculate the return and risk on the two-asset portfolio using Moody's Analytics Portfolio Manager.
Dhofar Energy Services has a Beta = 1.18 The risk-free rate on a treasury bill is currently 4.4% and the cost of equity has 20.70%. What is the market return? Select one: a. 0.2149 b. 0.1821 c. 0.2169 d. 1.1381 e. All the given choices are not correct

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