Under this new and more debt-oriented arrangement, the after-tax cost of debt is 8.8%; the cost of preference shares in 11%; and the cost of equity is 15.6%. Discuss the issues which are pertinent to the choice between the 2 alternative capital structures.
Q: The projected annual net cash flows associated with an investment opportunity are shown below in…
A: Here,
Q: Mark borrowed 350,000 pesos from Anthony with a 11.23% simple interest rate. How much money will…
A: Here, Borrowed Amount is 350,000 pesos Simple Interest Rate is 11.23% Time Period is 5 years
Q: Calculate the time it will take for an investment of $25 000, invested at a simple interest rate of…
A: Simple interest is interest earned on the 'initial' principal amount invested at the simple interest…
Q: APhP10000,5%bondwithsemiannualcouponsispricedtoyield7%.Findthepriceifthebondis redeemable at par at…
A: Bonds are debt instruments issued by companies looking to raise funds. Bonds pay interest or coupons…
Q: Problem 12-16 SML and WACC [LO 4] An all-equity firm is considering the following projects: Project…
A: As per the given information: Project Beta IRR W .54 10.1% X .91 10.6 Y 1.09 14.1 Z 1.83…
Q: if $875 000 is saved for retirement, what rate of interest, compounded semi-annually, will provide…
A: We will use the concept of time value of money here. As per the concept of time value of money the…
Q: Keith secured a lease on a machine by paying $1,900 as a down payment. at the beginning of every…
A: Loans are paid by the monthly payments of loan these carry the payment for interest and payment for…
Q: Viper Construction’s days sales outstanding is 50 days (on a 365-day basis). The company’s accounts…
A: Days sales outstanding measures the number of days the credit sales revenue is outstanding i.e. the…
Q: The average inflation rate in Canada is 3% per year. It means that purchasing power of $1 decreases…
A: the total decrease in the purchasing power of money in 10 years when in n years the decrease is…
Q: State Dep Rec Prob 0.1 0.3 Return 0.04 0.18
A: The expected return is the weighted probabilistic rate of return that is realized on stock…
Q: A4) Monthly Payments and Finance Charges or an Add-on Rate Loan Zachary Porter of Abilene, Texas, is…
A: The add-on method is used to calculate the amount of cost that occurs when a loan is approved. It…
Q: What rate of return should Jenny expects to receive on her portfolio?
A: Portfolio Return: It refers to the profit or loss realized by the portfolio comprising various…
Q: Dr. Magneto is evaluating whether to open a private MRI clinic in leased office space in a local…
A: After tax salvage value of machine After tax salvage value of machine is calculated as shown below.…
Q: You want to buy a new sports coupe for $75,100, and the finance office at the dealership has quoted…
A: Loan Amount is $75,100 APR is 7.5% Total Number of months is 72 Monthly rate is 7.5%12=0.625% To…
Q: imate that the correlation between Abercrombie and Fitch (ANF) stock returns with market portfolio…
A: Beta of stock shows the risk related to overall market that means how much will change in stock…
Q: You want to save 10,000 for a down payment on a home by making regular monthly deposits over 4…
A: Given: Particulars Amount Down payment(FV) $10,000 Years 4 Interest rate 7.50%
Q: What is the standard deviation of Stock B returns given the information below about its returns…
A: Standard Deviation: Standard deviation is a measure of the dispersion of a set of data relative to…
Q: Find the monthly house payment necessary to amortize the following loan. In order to purchase a…
A: Monthly payments are like annuities. An annuity is a fixed amount of money that has to be paid in…
Q: Suppose that you earn $45,600 per year. What is your monthly salary? Assume that you deposit 10% of…
A: Future value of annuity The future value of annuity refers to the total value of the investment at…
Q: Jam invested P500,000 in BPI Philippine Equity Index Fund on Aug 6, 2019 at a NAVPU of P104.75. On…
A:
Q: Malaysian investor has an amount of RM10 million being invested in a US dollar deposit account at a…
A: Note: This question has two parts. In order to answer the second part, the local interest rate in…
Q: Anna-Mae Inc is going to issue a bond whereby they would pay a coupon with rate equal to the markets…
A: Price of bond depends on the coupon rate ,yield to maturity and period of maturity of bond. Price of…
Q: quantity = 82,000 units. Suppose the company believes all of its estimates are accurate only to…
A: Revenue: It is the amount of money generated by the firm from its business activities. It is also…
Q: 1. Business Organization Green Corporation (GC) is stock corporation engaged in the events…
A: In this question, Green Corporation is an Event Management Company. The products segment of this…
Q: t at PJ Brokers estimates that the beta of stock ZLX is close to two (2.0). Therefore, ZLX will…
A: The expected rate of return depends on the risk of stock and risk of stock depends on the risk…
Q: please elaborate or explain the 5 factors
A: Banks are important financial institutions. They accept deposits and make loans.
Q: This type of risk is related to overall market or the economy and it is Non-diversifiable. However,…
A: Risk is an uncertainty of loss whereas in finance it is related to financial loss. There are two…
Q: If your required return on these shares is 9%. How much would you be willing to pay for a share of…
A: Value of Common Shares: The value of common shares is estimated by discounting all the future…
Q: The expected market return is E(RM)is estimated to be 12% per annum, while the risk-free return (rf)…
A: Solution:- Capital Asset Pricing Model (CAPM) is the equity model, which computes required return of…
Q: Company PPInvest has a project will produce cash inflows of $3,200 a year for 4 years with a final…
A: Decision-making is the final step of capital budgeting. The decisions should be made after using the…
Q: m currently pays a dividend of 4 EURO per share. That dividend is expected to grow a a 5% rate…
A: Value of stock can be found based on the constant dividend growth model based on required rate of…
Q: Prisha received a loan of $8,100 at 5.25% compounded monthly. He settled the loan making periodic…
A: Loans are paid by the periodic payments these are paid by equal periodic payments that carry payment…
Q: Ying Import has several bond issues outstanding, each making semiannual interest payments. The bonds…
A:
Q: Assuming that the expectations theory is the correct theory of the term structure, calculate the…
A: The expectations theory states that over the same period, the overall interest rate of small-term…
Q: A man uses a loan program for small businesses to obtain a loan to help expand his vending machine…
A: The simple interest is one of the method of calculating interest. In simple interest, the interest…
Q: What would be the expected price of UPS stock on this date, if estimated using the method of…
A: Earnings per shares (EPS) refers to the amount of profit earned by each shareholder after paying all…
Q: Given the re-stated information below (and expected returns you should have already calculated),…
A: State Prob (Pi) Return A (Ra) Return B (Rb) Pi(Ra) Pi(Rb) Dep 0.1 -0.25 0.04 -0.025 0.004 Rec…
Q: You are a financial analyst for the Brittle Company. The director of capital budgeting has asked you…
A: Given, The initial investment is $10,000 The cost of capital is 12%
Q: Consider the following premerger information about a bidding firm (Firm B) and a target firm (Firm…
A: Given, Two firms B and T. The synergic benefits are $7800 The cash price offered is $24
Q: 1.Determine the missing values represented by K, L, M, and N in Table 5. A K = 0.8929; L = R196 438;…
A: Present value discount factor With discount or interest rate (r) and period (n), the present value…
Q: 1.2) You just inherited a trust that will pay you $100,000 per year in perpetuity. However, the…
A: Solution:- When an amount is receivable forever at interval of equal periods, it is called…
Q: What should be the balance in a Registered Retirement Income Fund (RRIF) that w rovide $2,500 at the…
A: More is the compounding of interest more is the interest being accumulated over the period of time…
Q: Assume that your company has the cost of equity of 3% (for the purpose of preventing error carried…
A: Growth rate 0.03227 D1 1.73422 P0 26.78
Q: A company makes and sells ornamental vases. To make the vases there is a fixed monthly cost of…
A: The Basic Sales Equation is Sales = Variable Cost + Fixed Cost + Profit
Q: Please use information to answer the question below: A US firm's expected Accounts Payable in UK due…
A: Under Money Market Hedge If we will required the amount to paid in other country then in such case…
Q: compute each investment payback period.
A: Payback Period: It is a method used in capital budgeting to determine the time it will take for the…
Q: 1.1) Find the EAR in each of the following cases: Stated rate (APR) # of times per year…
A: It is the case of multiple questions where no question has been specified so we will solve only the…
Q: how much of your capital (what weight) would you invest in stock A to maximize your portfolio's…
A: Weight for minimum risk is that point on which investor will received the highest return with…
Q: A 3,000,000 peso loan is to be amortized at 4.55% quarterly for 2 years. Solve for the value inside…
A: Amortization schedule: Loan amortization plans are frequently used in connection with installment…
Q: In 1895, the first U.S. Open Golf Championship was held. The winner's prize money was $160. In 2019,…
A: Value of Prize money in 1895 is $160 Value of Prize money in 2019 is $1,400,000 To Find: Annual…
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
Step by step
Solved in 2 steps
- B Company stated that its optimal capital structure consists of debt taking up 30% of its total capital. B Company's existing and target capital structure is as shown. Source of Capital Target Weights Existing Weights Cost of Source Long Term Debt 30% 10% 8% Preferred Stock 15% 15% 13% Common Stock Equity 55% 75% 15% 1. Calculate the existing and target WACC of B Company 2. Would you suggest B Company to increase its long term debt to 80% and decreasing common stock equity to 5% since the cost of debt seems to be lower than equity?Evans Technology has the following capital structure. Debt Common equity The aftertax cost of debt is 8.50 percent, and the cost of common equity (in the form of retained earnings) is 15.50 percent. a. What is the firm's weighted average cost of capital? Note: Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places. 48% 60 Debt Common equity Weighted average cost of capital Weighted Cost % % An outside consultant has suggested that because debt is cheaper than equity, the firm should switch to a capital structure that is 50 percent debt and 50 percent equity. Under this new and more debt-oriented arrangement, the aftertax cost of debt is 9.50 percent, and the cost of common equity (in the form of retained earnings) is 17.50 percent. b. Recalculate the firm's weighted average cost of canitalEvans Technology has the following capital structure. Debt Common equity 35% 65 The aftertax cost of debt is 7.50 percent, and the cost of common equity (in the form of retained earnings) is 14.50 percent. a. What is the firm's weighted average cost of capital? Note: Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places. Debt Common equity Weighted average cost of capital Weighted Cost % % An outside consultant has suggested that because debt is cheaper than equity, the firm should switch to a capital structure that is 50 percent debt and 50 percent equity. Under this new and more debt-oriented arrangement, the aftertax cost of debt is 8.50 percent, and the cost of common equity (in the form of retained earnings) is 16.50 percent. Debt Common equity Weighted average cost of capital b. Recalculate the firm's weighted average cost of capital. Note: Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal…
- After careful analysis, Excellence Berhad has determined its optimal capital structure as shown in the following table. Source of capital Target market value weight Long-term debt 30% Preference share 15% Ordinary share 55% Total 100% The cost of debt is estimated to be 7.2%; the cost of preference share is estimated to be 13.5%, the cost of retained earnings is estimated to be 16%; and the cost of new ordinary share is estimated to be 18%. All of these are after-tax rates. Excellence Berhad expects to have a significant amount of retained earnings available and does not intend to sell any new ordinary share. Calculate the WACC of Excellence BerhadThe company's capital structure is as follows Debt Weight 25%. Preferred Stock Weight 25% Common equity Weight 50%. The cost of debt is 12%6, the cost of preferred stock is 15% and the cost of common equity is 0.244 Calculate the companys weighted average Cost of tapital. Select one: Oa ob920 Ob.0.1895 Oc01520 Od All the given choices are not correct Oe 0.1595134 Richmond Clinic has obtained the f;llo i i : wing esti i of debt and equity at various capital structu?-cc:f e Percent Debt After-Tax Cost of Debt ~ Cost of Equity 0% = 16% 20 6.6% 17 40 7.8 19 60 10.2 22 80 14.0 27 What is the firm’s optimal capital structure? (Hint: Calculate its pital at each structure. Also, note that data on corporate cost of ca component costs at alternative capital structures are not reliable in real-world situations.) > e e 1Is daividend
- Review this situation: Transworld Consortium Corp. is trying to identify its optimal capital structure. Transworld Consortium Corp. has gathered following financial information to help with the analysis. Debt Ratio 30% 40% 50% 60% 70% Equity Ratio 70% 60% 50% 40% 30% WACC 9.71% 9.55% 10.02% 7.55% 11.30% 10.78% 8.24% 12.80% 11.45% rd Is 6.02% 9.40% 6.75% 9.750% 7.15% 10.60% Which capital structure shown in the preceding table is Transworld Consortium Corp.'s optimal capital structure? Debt ratio= 30%; equity ratio = 70% Debt ratio = Debt ratio = 70%; equity ratio = 30% Debt ratio= 50%; equity ratio = 50% 60%; equity ratio = 40% Debt ratio = 40%; equity ratio = 60%8.4 Richmond Clinic has obtained the following estimates for its costs of debt and equity at various capital structures: Debt (%) After-Tax Cost of Debt (%) Cost of Equity (%) 0 — 16.0 20 6.6 17.0 40 7.8 19.0 60 10.2 22.0 80 14.0 27.0 What is the firm’s optimal capital structure? (Hint: Calculate its corporate cost of capital at each structure. Also, note that data on component costs at alternative capital structures are not reliable in real-world situations)Review this situation: Transworld Consortium Corp. is trying to identify its optimal capital structure. Transworld Consortium Corp. has gathered the following financial information to help with the analysis. Debt Ratio Equity Ratio rdrd rsrs WACC 30% 70% 7.00% 10.50% 8.61% 40% 60% 7.20% 10.80% 8.21% 50% 50% 7.70% 11.40% 8.01% 60% 40% 8.90% 12.20% 8.08% 70% 30% 10.30% 13.50% 8.38% Which capital structure shown in the preceding table is Transworld Consortium Corp.’s optimal capital structure? Debt ratio = 70%; equity ratio = 30% Debt ratio = 60%; equity ratio = 40% Debt ratio = 40%; equity ratio = 60% Debt ratio = 30%; equity ratio = 70% Debt ratio = 50%; equity ratio = 50% Consider this case: Globo-Chem Co. has a capital structure that consists of 30% debt and 70% equity. The firm’s current beta is 1.25, but management wants to understand Globo-Chem Co.’s market risk without the effect of leverage. If…
- The company's capital structure is as follows: Debt Weight 25%, Preferred Stock Weight 25%, Common equity Weight 50%. The cost of debt is 12%, the cost of preferred stock is 15% and the cost of common equity is 0.244. Calculate the company's weighted average cost of capital. Select one: O a. 0.0920 O b. 0.1895 Oc.0.1520 O d. All the given choices are not correct O e. 0.1595Assume the following data for U&P Company: Debt (D) = $100 million; Equity (E) = $300 million; rD = 6%; rE = 12%; and TC = 30%. Calculate the after-tax weighted average cost of capital (WACC): Multiple Choice A) 10.5% B) 10.05% C) 15% D) 9.45%After careful analysis, Dexter Brothers has determined that its optimal capital structure is composed of the sources and target market value weights shown in the following table Source of capital Target market value weight Long-term debt 20% Preferred stock 13 Common stock equity 67 Total 100% The cost of debt is estimated to be 4.8%;the cost of preferred stock is estimated to be 11.7%;the cost of retained earnings is estimated to be 15.2%;and the cost of new common stock is estimated to be 17.2%.All of these are after-tax rates. The company's debt represents 15%,the preferred stock represents 8%,and the common stock equity represents 77%of total capital on the basis of the market values of the three components. The company expects to have a significant amount of retained earnings available and does not expect to sell any new common stock. a. Calculate the weighted average cost of capital on the basis of historical market value weights.…