As a first step, we need to estimate what percentage of MMMs capital comes from debt, preferred stock, and common equity. This information can be found on the firms latest annual balance sheet. (As of year end 2014, MMM had no preferred stock.) Total debt includes all interest-bearing debt and is the sum of short-term debt and long-term debt. a. Recall that the weights used in the WACC are based on the companys target capital structure. If we assume that the company wants to maintain the same mix of capital that it currently has on its balance sheet, what weights should you use to estimate the WACC for MMM? b. Find MMMs market capitalization, which is the market value of its common equity. Using the sum of its short-term debt and long-term debt from the balance sheet (we assume that the market value of its debt equals its book value) and its market capitalization, recalculate the firms debt and common equity weights to be used in the WACC equation. These weights are approximations of market-value weights. Be sure not to include accruals in the debt calculation.

An equity analyst, has determined that the appropriate ratio of Enterprise Value to EBITDA (EV/EBITDA) for Bulldogs Inc. is 10.2. The analyst has also collected the following forecasted information for Bulldogs Inc.: EBITDA = ₽22,000,000 Market value of debt = ₽56,000,000 Cash = ₽1,500,000  The value of equity for Bulldogs Inc. is closest to:

Diol Athletics is trying to determine its optimal capital structure, which now consists of only debt and common equity. The firm does not currently use preferred stock in its capital structure, and it does not plan to do so in the future. To estimate how much its debt would cost at different debt levels, the company’s treasury staff has consulted with investment bankers and, on the basis of those discussions, has created the following table: Structure Market Debt-to-Value Ratio (Wd) Market Equity-to-Value Ratio (Ws) Bond Rating Pre-tax Cost of Debt (rd) A 0.0 1.0 AA 9.0% B 0.2 0.8 BBB 10.5% C 0.5 0.5 BB 11.6% D 0.6 0.4 C 12.7% E 0.75 0.25 D 14.0%   Diol uses the CAPM to estimate its cost of common equity, rs. The company estimates that the risk-free rate is 7%; the market risk is 13%, and the company’s tax rate is 20%. Diol estimates that if it had no debt, its “unlevered” beta, bU, would be 1.3. What is the…

Your client wishes for you to evaluate the current structure of Homestarter Ltd. (a small investment company) in an aim to identify the current returns required for the company. This company has the following balance sheet and details: (picture)   Notes: The company’s bank has advised that the interest rate on any new debt finance provided for the projects would be 7% p.a. if the debt issue is of similar risk and of the same time to maturity and coupon rate. There are currently 150,000 preference shares on issue, which pay a dividend of $1.30 per year. The preference shares currently sell for $8.20.  The company’s existing 600,000 ordinary shares currently sell for $2.85 each. You have identified that Homestarter has recently paid a $0.28 dividend. Historically, dividends have increased at an annual rate of 3% p.a. and are expected to continue to do so in the future. The company’s tax rate is 25%.  Your client wishes to understand, with the use of workings, the following aspects of…

Upon further investigation, you hare found that the amount of account payables for Companies A and X at the start of the year is 20,000 and 30,000, respectively. Apart from that, the amount of credit purchase for Companies A and Bis 250,000 and 280,000, respectively. Based on all this information, recommend on which company that gire lower risk to your company. The recommendation must be ustified by the following analysis:. a) Liquidity analysis. b) Solvency analysis. c) Any other financial analysis that you. think can help in making your decision. Table: Balance Sheet for Company A and Company B Assets 280,000 110,000 140,000 100,000 100,000 730,000 Fixed Assets Other Non-Current Assets 250,000 80,000 120,000 80,000 120,000 650,000 Account Receivables Inventory Cash ТОTAL Liabilities Capital Long Term Debt Account Payables Other Current Liabilities ТОTAL 250,000 120,000 160,000 120,000 650,000 280,000 140,000 180,000 130,000 730,00

K-Life financial services Limited uses risk-adjusted return on capital (RAROC) to measure performance on several aspects. In this regard, imagine that an investment officer wants to execute a transaction with the following characteristics: Probability of default (PD) = 30 basis points Loss given default (LGD) = 55% Exposure at default (EAD) = K 1.45 million Expected loss (EL) = K 2,750 This is a loan to a company in the Agro industrial. The firm’s economic capital (EC) model is based on the 99% confidence level, with an average standard deviation of 2.15%. The risk-free rate of return is 6%. Assume that the bank has set a RAROC hurdle rate of 15% and this transaction has a net profit of K10, 500. REQUIRED: Compute the K-life’s risk-adjusted rate of return on this transaction. Now assume that K-life could also have made a loan for the same amount to a firm in the service industry, and that the standard deviation for economic capital purposes in this case is 1.29%. Compute the bank’s…

As the assistant to the CFO of Johnstone Inc., you must estimate its cost of common equity. You have been provided with the following data: D0 = $0.80; P0 = $22.50; and g = 8.00% (constant). Based on the DCF approach, what is the cost of common from retained earnings? Please show formula and answer

Travellers Inn (Millions of Dollars) Cash $ 10 Accounts payable $ 10 Accounts 20 Accruals 15 receivable Inventories 20 Short-term debt Current assets $ 50 Current liabilities $ 25 Net fixed assets 50 Long-term debt 30 Preferred stock (50,000 shares) Common equity Common stock (3,800,000 shares) $ 10 Retained earnings 30 Total common equity $ 40 Total assetS $100 Total liabilities and equity $100 The following facts also apply to TII: 1. The long-term debt consists of 29,412 bonds, each having a 20-year maturity, semiannual payments, a coupon rate of 7.8%, and a face value of $1,000. Currently, these bonds provide investors with a yield to maturity of 11.8%. If new bonds were sold, they would have an 11.8% yield to maturity. 2. TII's perpetual preferred stock has a $100 par value, pays a quarterly dividend per share of $2, and has a yield to investors of 8%. New perpetual preferred stock would have to provide the same yield to investors, and the company would incur a 3.55% flotation…

The following were gathered for estimating the cost of equity of KKK Corporation: Return on Treasury Bonds = 4%; Return on the Market = 10%; Return on KKK Bonds = 6%. Upon analysis, you determined that the beta of KKK shares relating to the market return is 1.2 while a risk premium of 4% should be given to KKK's investors over its creditors. How much is the cost of equity using the capital asset pricing model?