You are analyzing the cost of capital for a firm that is financed with $300 million of equity and $200 million of debt. The before-tax cost of debt capital for the firm is 4 percent. The beta of the company's stock is 1.5. The risk-free rate is 2%, and the market risk premium is 6%. Assume the firm's marginal tax rate is 30%, the company's weighted average cost of capital (WACC) is closest to 7.7% O 5.9% O 8.2% O 6.4%

You are analyzing the cost of capital for a firm that is financed with $300 million of equity and $200 million of debt. The before-tax cost of debt capital for the firm is 4 percent. The beta of the company's stock is 1.5. The risk-free rate is 2%, and the market risk premium is 6%. Assume the firm's marginal tax rate is 30%, the company's weighted average cost of capital (WACC) is closest to 7.7% O 5.9% O 8.2% O 6.4%

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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You have been assigned to calculate the Weighted-Average-Cost-of-Capital (WACC) for your small firm The company has three sources of long-term capital. Its marginal tax rate is 21% First, there are 2,354.000 shares of common stock outstanding which are currently trading at $37.51 per share. You estimate that your firm hasa beta of 0.90, and that the long-term return in equity markets will be 11.50%. The current return on short-term T-Bills is 2.25% Second, the firm has 190,000 shares of preferred stock outstanding. These shares pay annual (perpetual) dividends of $7.00 per share, and are currently selling for $94.62. Third, there is an issue of 62.500 coupon bonds outstanding. These bonds have a face value of $1.000, mature in seventeen years, and pay 5,74% annual coupons These instruments are currently trading for $1,054.23. Based on the data, what portion of the market value of the firm's assets are financed with debt? Ⓒ$1.29% 38.27% 37.03% Q61.73% 42.73%
Chelsea Gonzales Industries is trying to estimate the firm's optimal capital structure. The company has $100 million in assets, which is financed with $40 million of debt and $60 million in equity. The risk-free rate, KRF, is 3 percent, the market risk premium, km – krf, is 8 percent, and the firm's tax rate is 40 percent. Currently, the firm's cost of equity (ks) is 16.72 percent (determined on the basis of the CAPM). What would the firm's estimated cost of equity be if it were to change its capital structure from its present capital structure to 30 percent debt and 70 percent equity? A. 16.76 percent B. 15.32 percent C. 16.28 percent D. 15.69 percent E. 15.22 percent A B O D ΟΕ
The overall cost of capital for Julius Seven is 11%. The firm is financed with 40% debt that offers a promised return of 7% and has an expected return of 6%. Julius Seven is in the 35% marginal tax bracket. What is Julius Seven's weighted average cost of capital? 9.6% 10.2% 11.0% 6.5%
WACC
Crowley Company has a capital structure with 30% debt at a 9% interest rate. Its beta is 1.3, the risk-free rate is 1.5%, and the market risk premium is 8%. The company has no preferred stock. Its combined federal-plus-state tax rate is 25%. a. Calculate the company's cost of equity b. Calculate the company's weighted average cost of capital c. Calculate he the company’s unlevered cost of equity
Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following weights: 40% long-term debt, 15% preferred stock, and 45% common stock equity (retained earnings, new common stock, or both). The firm's tax rate is 26%. Debt The firm can sell for $1005 a 13-year, $1,000-par-value bond paying annual interest at a 6.00% coupon rate. A flotation cost of 2.5% of the par value is required. Preferred stock 7.00% (annual dividend) preferred stock having a par value of $100 can be sold for $98. An additional fee of $5 per share must be paid to the underwriters. Common stock The firm's common stock is currently selling for $80 per share. The stock has paid a dividend that has gradually increased for many years, rising from $2.50 ten years ago to the $4.92 dividend payment, D0, that the company just recently made. If…
If I can buy a share now in BMW on the stock market for £30 or sell now for £28 what is the bid ask spread for BMW shares?
Suppose you are estimating the WACC for Columbus Inc. It has the following data from its balance sheet: total debt = $290 million; total equity=$60 million. It has 20 million shares outstanding, and its stock is trading at $32 per share. Your analysis shows that the company's current borrowing rate is 7%, and that the cost of equity is 13%. If the company marginal tax rate is 30%, what is its WACC?
K. Bell Jewelers wishes to explore the effect on its cost of capital of the rate at which the company pays taxes. The firm wishes to maintain a capital structure of 30% debt, 20% preferred stock, and 50% common stock. The cost of financing with retained earnings is 13% the cost of preferred stock financing is 9%, and the before-tax cost of debt financing is 7%. Calculate the weighted average cost of capital (WACC) given a tax rate of 21%.
Corcovado Pharmaceuticals. Corcovado Pharmaceutical’s cost of debt is 7%. The risk-free rate of interest is 3%. The expected return on the market portfolio is 8%. After effective taxes, Corcovado’s effective tax rate is 25%. Its optimal capital structure is 60% debt and 40% equity. If Corcovado’s beta is estimated at 1.1, what is its weighted average cost of capital? If Corcovado’s beta is estimated at 0.8, significantly lower because of the continuing profit prospects in the global pharma sector, what is its weighted average cost of capital?
a firm has an asset base with a market value of 5.3 million. ITs debt is worth 2.5 million. if 0.2 million is paid in interest annually and the shareholders expect a 16% annual return, what is the weighted average cost of capital assuming no corporate taxes? what is the WACC if corporate taxes are 45%?

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