Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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- Beagle Beauties engages in the development, manufacture, and sale of a line of cosmetics designed to make your dog look glamorous. Below you will find selected information necessary to compute some valuation estimates for the firm. Assume the values provided are from year-end 2021. Also assume that the firm's equity beta is 1.30, the risk-free rate is 2.55 percent, and the market risk premium is 7.0 percent. Dividends per share. Return on equity Book value per share 2021 value per share. Average price multiple Forecasted growth rate $ 2.22 9.50% $18.40 Share price Earnings $ 5.00 13.10 13.57% Cash Flow $ 6.50 9.51 11.32% Sales $25.65 2.45 7.17% The sustainable growth rate is 5.282 percent, and the required return is 11.65 percent. Use the clean surplus relationship to calculate the share price for Beagle Beauties with the residual income model. Note: Do not round intermediate calculations. Round your answer to 2 decimal places.arrow_forwardABC, Inc. has equity beta of 1.75 with total assets financed with 80% of equity. The expected excess return on the market is 7 percent, and the risk-free rate is 3 percent. The firm is considering cutting total equity to 60% of total value. What would the cost of equity be if the firm meets its target?arrow_forwardThe common stock of ABX, Inc. has a beta of 0.90. The Treasury bill rate is 4% and the market risk premium is estimated at 8%. The debt-to-equity ratio of the company is 0.35, the cost of debt is 6%, and the tax rate is 21%. The company is considering a project that will result in initial after-tax cash savings of $5 million at the end of the first year, and these savings will grow at a rate of 4% per year indefinitely. The project is less risky than the usual project the firm undertakes. Management uses the subjective approach and applies an adjustment factor of -1% to the overall cost of capital for similar projects. If the project requires an initial investment of $20 million, what is the NPV? Please show excel forumlasarrow_forward
- Assume that you are on the financial staff of Davis Enterprises, and you have collected the following data: (1) The yield to maturity on the company's outstanding 9% annual coupon bonds is 7%, and its tax rate is 25 %. (2) The risk-free rate is 3.5%, the market risk premium (rM - rRF) is 6.0%, and the firm's beta is 1.05. (3) The firm's capital structure consists of 40% debt and 60% equity. What is Davis's WACC? a. 7.98 % b. 8.33 % c. 8.68 % d. 9.24 % e. 9.80%arrow_forwardYou are going to value Lauryn's Doll Co. using the FCF model. After consulting various sources, you find that Lauryn's has a reported equity beta of 1.5, a debt-to-equity ratio of .4, and a tax rate of 21 percent. Based on this information, what is the asset beta for Lauryn's? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Answer is complete but not entirely correct. Lauryn's asset 1.22 x betaarrow_forwardYou are going to value Lauryn’s Doll Co. using the FCF model. After consulting various sources, you find that Lauryn's has a reported equity beta of 1.4, a debt-to-equity ratio of .5, and a tax rate of 21 percent. Assume a risk-free rate of 4 percent and a market risk premium of 9 percent. Lauryn’s Doll Co. had EBIT last year of $42 million, which is net of a depreciation expense of $4.2 million. In addition, Lauryn's made $6 million in capital expenditures and increased net working capital by $1.0 million. Assume the FCF is expected to grow at a rate of 3 percent into perpetuity. What is the value of the firm? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)arrow_forward
- Assume that you are on the financial staff of ABC Enterprises, and you have collected the following data: (1) The yield to maturity on the company's outstanding 10% annual coupon bonds is 8%, and its tax rate is 25%. (2) The risk-free rate is 2%, the market risk premium (rM - rRF) is 5.5%, and the firm's beta is 1.20. (3) The firm's capital structure consists of 40% debt and 60% equity. What is ABC's WACC? a . 6.50% b. 7.14% c. 7.56% d. 7.90% e. 8.60%arrow_forwardSuppose you are estimating the WACC for Columbus Inc. It has the following data from its balance sheet: total debt = $200 million; total equity=$120 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?arrow_forwardA company is considering its optimal capital structure. The firm currently has 1 million shares outstanding at $ 20 per share (tax rate = 40%) and a debt balance of $5 million. Currently, its (levered) beta is 1.5 and its ERP is 5.5%. The current risk-free rate is 5%. Your research indicate the following ratings and pre-tax cost of debt across the different debt ratios: D/(D+E) Rating Pre-tax cost of debt 0% AAA 10% 10% AA 10.5% 20% A 11% 30% BBB 12% 40% BB 13% 50% B 14% 60% CCC 16% 70% CC 18% 80% C 20% 90% D 25% a. Using the optimal WACC approach, what is the firm's optimal debt ratio? b. Calculate the company's unlevered value, assuming that the probability of default is 5% and the company loses 30% of its value in the event of a default.arrow_forward
- Beagle Beauties engages in the development, manufacture, and sale of a line of cosmetics designed to make your dog look glamorous. Below you will find selected information necessary to compute some valuation estimates for the firm. Assume the values provided are from year - end 2021. Also assume that the firm's equity beta is 1.40, the risk - free rate is 2.60 percent, and the market risk premium is 8.0 percent. Dividends per share $ 2.44 Return on equity 10.50% Book value per share $ 20.05 Earnings Cash Flow Sales 2021 value per share $ 5.00 $ 6.40 $ 25.65 Average price multiple 13.10 9.62 2.56 Forecasted growth rate 13.68% 11.21% 7.39% Using the PE, P/CF, and P/S ratios, estimate the 2022 share price for Beagle Beauties. Note: Do not round intermediate calculations. Round your answers to 2 decimal places. DO NOT USE EXCEL please leave a key for the formula thank youarrow_forwardNewLinePhone Corp. is very risky, with a beta equal to 2.8 and a standard deviation of returns of 32%. The risk-free rate of return is 3% and the market risk premium is 8%. NewLinePhone's marginal tax rate is 35%. Use the capital asset pricing model (CAPM) to estimate NewLinePhone's cost of retained earnings. (*You must show your calculation process as well.)arrow_forwardRolex, Inc. has equity with a market value of $20 million and debt with a market value of $10 million. Assume the firm has no default risk and can borrow at the risk-free interest rate. The risk-free interest rate is 5 percent per year, and the expected return on the market portfolio is 11 percent. The beta of the company's equity is 1.2. The tax rate is 20%. What is the cost of capital for an otherwise identical all-equity firm?arrow_forward
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