Unlevered Cost of EquityElliott's Cross Country TransportationServices has a capital structure with25% debt at a 10% interest rate. Itsbeta is 1.5, the risk-free rate is 4%, andthe market risk premium is 8%. Elliott'scombined federal-plus-state tax rate is25%.What is Elliott's cost of equity? Do notround intermediate calculations.Round your answer to two decimalplaces.%What is its weighted average cost ofcapital? Do not round intermediatecalculations. Round your answer totwo decimal places.%What is its unlevered cost of equity?Do not round intermediatecalculations. Round your answer totwo decimal places.%

concept. β 1. according to CAPM ( capital asset pricing model ), ke = Rf + β ( Rm - Rf) where ,…

Answered: Unlevered Cost of Equity Elliott's…

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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Fill in the table using the following information.Assets required for operation: $3,000Case A—firm uses only equity financingCase B—firm uses 30% debt with a 10% interest rate and 70% equityCase C—firm uses 50% debt with a 12% interest rate and 50% equityIf your answer is zero, enter "0". Round your answers for monetary values to the nearest cent. Round your answers for percentage values to one decimal place. A B C Debt outstanding $ $ $ Stockholders' equity $ $ $ Earnings before interest and taxes $660.00 $660.00 $660.00 Interest expense $ $ $ Earnings before taxes $ $ $ Taxes (40% of earnings) $ $ $ Net earnings $ $ $ Return on stockholders’ equity % % % What happens to the rate of return on the stockholders' investment as the amount of debt increases? The rate of return on the stockholders' investment as the amount of debt increases.
Fill in the table using the following information. Assets required for operation: $3,800 Case A-firm uses only equity financing Case B firm uses 30% debt with a 10% interest rate and 70% equity Case C-firm uses 50% debt with a 12% interest rate and 50% equity If your answer is zero, enter "O". Round your answers for monetary values to the nearest cent. Round your answers for percentage values to one decimal place. A B C Debt outstanding $ 2$ Stockholders' equity 3 Earnings before interest and taxes $608.00 $608.00 $608.00 Interest expense $ $ Earnings before taxes $ 24 $ Taxes (40% of earnings) $ $ $ Net earnings $ Return on stockholders' equity % % %24 %24 %24 %24 %24 %24 %24 %24 %24
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 canital
Gaucho Services starts life with all-equity financing and a cost of equity of 13%. Suppose it refinances to the following market-value capital structure: Debt (D) Equity (8) 418 at p = 8.6% 59% a. Use MM's proposition 2 to calculate the new cost of equity. Gaucho pays taxes at a marginal rate of To 30%. b. Calculate Gaucho's after-tax weighted-average cost of capital Note: Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. a. Return on equity b. After-tax WACC %
Fill in the table using the following information.Assets required for operation: $4,200Case A—firm uses only equity financingCase B—firm uses 35% debt with an 8% interest rate and 65% equityCase C—firm uses 50% debt with a 10% interest rate and 50% equityIf the answer is zero, enter "0". Round your answers for monetary values to the nearest cent. Round your answers for percentage values to one decimal place. A B C Debt outstanding $ $ $ Stockholders' equity $ $ $ Earnings before interest and taxes $420 $420 $420 Interest expense $ $ $ Earnings before taxes $ $ $ Taxes (40% of earnings) $ $ $ Net earnings $ $ $ Return on stockholders’ equity % % % What happens to the return on the stockholders’ equity as the amount of debt increases? Why did the rate of interest increases in case C? The return on stockholders' equity as the firm becomes financially leveraged. The rate…
Help Save & Exit Submit Wentworth's Five and Dime Store has a cost of equity of 11.9 percent. The company has an aftertax cost of debt of 5.2 percent, and the tax rate is 40 percent. If the company's debt-equity ratio is .79, what is the weighted average cost of capital? Multiple Choice 6.99% 8,03% 8.94% 7.57% 6.94% 12 of 40 Ne > ( Prev
Suppose that TapDance, Inc's, capital structure features 65 percent equity, 35 percent debt, and that its before-tax cost of debt is 6 percent, while its cost of equity is 11 percent. Assume the appropriate weighted average tax rate is 34 percent. What will be TapDance's WACC? (Round your answer to 2 declmal placcs.) nces. Mc Graw Type here to search | 五 LE
ont question Kose, Inc., has a target debt-equity ratio of 1.63. Its WACC is 7.4 percent, and the tax rate is 25 percent. Required: If the company's cost of equity is 15 percent, what is its pretax cost of debt? (Do not round Intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 3216.) a. b. If instead you know that the aftertax cost of debt is 5.6 percent, what is the cost of equity? (Do not round Intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 3216.)
Consider two hypothetical firms: Firm U, which uses no debt financing, and Firm L, which uses €10,000 of 12 percent debt. Both firms have €20,000 in assets, a 40 percent tax rate, and an expected EBIT of €3,000. Construct partial income statements, which start with EBIT, for the two firms. Answers: Firm U Firm L Assets €20,000 €20,000 Equity €20,000 €10,000 EBIT € 3,000 € 3,000 INT (12%) -------- -------- EBT Taxes (40%) --------- --------- NI €-------- €---------
Hilltop Paving has a levered equity cost of capital of 14.92 percent. The debt-to-value ratio is .4, the assumed tax rate is 23 percent, and the pretax cost of debt is 7.2 percent. What is the estimated unlevered cost of equity?
Consider two hypothetical firms: Firm U, which uses no debt financing, and Firm L, which uses €10,000 of 12 percent debt. Both firms have €20,000 in assets, a 40 percent tax rate, and an expected EBIT of €3,000. Construct partial income statements, which start with EBIT, for the two firms. Firm U Firm L Assets €20,000 €20,000 Equity €20,000 €10,000 EBIT € 3,000 € 3,000 INT (12%) ? ? EBT ? ? Taxes (40%) ? ? NI € ? € ?
You have been tasked with the responsibility of calculating the WACC for Meeks Investments Limited and Hall Developments Limited. The risk free rateis currently 4% and the market risk premium is 6.5%. The details for both companies are presented in the table below. the tax rate is 25%. MeeksInvestments Limited Hall Developments Limited Value of Common Equity $1,500,000 $3,000,000 Beta 2.18 1.52 Value of preferred Equity $1,000,000 $500,000 Preffered Dividends 4.50 $7.60 Priceof Preffered Stock $60 $80 Price of Bonds $970 $1,160 Coupon Rate (Paid semi- annually) 8% 11% par value of bonds $1,000 $1,000 years to Maturity 8 12 Value of Debt $2,500,000 $1,500,000 Use the information in the table above to calculate the WACC for both companies

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