Loose Leaf for Foundations of Financial Management Format: Loose-leaf
17th Edition
ISBN: 9781260464924
Author: BLOCK
Publisher: Mcgraw Hill Publishers
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
Chapter 11, Problem 27P
Delta Corporation has the following capital structure:
a. If the firm has
b. The 8.1 percent cost of debt referred to earlier applies only to the first
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
The liabilities and owners’ equity for Campbell Industries is found here.
What percentage of the firm’s assets does the firm now finance using debt (liabilities)?
If Campbell were to purchase a new warehouse for $1.4 million and finance it entirely with long-term debt, what would be the firm’s new debt ratio?
Assume that your company is trying to determine its optimal capital structure, which consists only of
debt and common stock. To estimate the cost of debt, the company has produced the following
table:
09.86%
9.56%
Percent Financed
With Debt
10.16%
8.96%
9.26%
0.10
0.20
0.30
0.40
0.50
Percent Financed
With Equity
0.90
0.80
0.70
0.60
0.50
Debt/Equity
Ratio
Now assume that the company's tax rate is 40 percent, that the company uses the CAPM to
estimate its cost of common equity, Ks, that the risk-free rate is 5 percent and the market risk
premium is 6 percent. Finally assume that if it has no debt its WACC would be equal to its cost of
equity which would be equal to 11 percent (you should now be able to determine its "unlevered
beta," bu).
0.10/0.90 0.11
0.20/0.80 0.25
Given this information, determine the firm's cost of capital if it finances with 40 percent debt and 60
percent equity.
0.30/0.70=0.43
0.40/0.600.67
0.50/0.50 = 1.00
Bond
Rating
AA
A
A
BB
B
Before-Tax
Cost of Debt
7.0%
7.2%…
You have the following data for your company.
Market Value of Equity: $520
Book Value of Debt: $130
Required rate of return on equity: 12%
Required rate of return on debt (pre-tax): 7%
Corporate tax rate: 25%
The company's debt is assumed to be is reasonably safe, so the book value of debt is a reasonably approximation for the market value of debt. Â
What is the weighted average cost of capital for this company?
Chapter 11 Solutions
Loose Leaf for Foundations of Financial Management Format: Loose-leaf
Ch. 11 - Why do we use the overall cost of capital for...Ch. 11 - How does the cost of a source of capital relate to...Ch. 11 - Prob. 3DQCh. 11 - Why is the cost of debt less than the cost of...Ch. 11 - What are the two sources of equity (ownership)...Ch. 11 - Explain why retained earnings have an associated...Ch. 11 - Why is the cost of retained earnings the...Ch. 11 - Why is the cost of issuing new common stock Kn...Ch. 11 - How are the weights determined to arrive at the...Ch. 11 - Explain the traditional, U-shaped approach to the...
Ch. 11 - Prob. 11DQCh. 11 - What effect would inflation have on a company’s...Ch. 11 - What is the concept of marginal cost of capital?...Ch. 11 - In March 2010, Hertz Pain Relievers bought a...Ch. 11 - Speedy Delivery Systems can buy a piece of...Ch. 11 - Prob. 3PCh. 11 - Prob. 4PCh. 11 - Calculate the aftertax cost of debt under each of...Ch. 11 - Prob. 6PCh. 11 - Prob. 7PCh. 11 - Prob. 8PCh. 11 - Airborne Airlines Inc. has a $1,000 par value bond...Ch. 11 - Russell Container Corporation has a $1,000 par...Ch. 11 - Prob. 11PCh. 11 - KeySpan Corp. is planning to issue debt that will...Ch. 11 - Medco Corporation can sell preferred stock for $90...Ch. 11 - Wallace Container Company issued $100 par value...Ch. 11 - Prob. 15PCh. 11 - Murray Motor Company wants you to calculate its...Ch. 11 - Compute KeandKn under the following...Ch. 11 - Business has been good for Keystone Control...Ch. 11 - Prob. 19PCh. 11 - Evans Technology has the following capital...Ch. 11 - Sauer Milk Inc. wants to determine the minimum...Ch. 11 - Given the following information, calculate the...Ch. 11 - Prob. 23PCh. 11 - Brook's Window Shields Inc. is trying to calculate...Ch. 11 - Prob. 25PCh. 11 - Prob. 26PCh. 11 - Delta Corporation has the following capital...Ch. 11 - The Nolan Corporation finds it is necessary to...Ch. 11 - The McGee Corporation finds it is necessary to...Ch. 11 - Eaton Electronic Company’s treasurer uses both...Ch. 11 - Compute the $ change in “Total Assets� over...Ch. 11 - Do the same computation for “Stockholders’...Ch. 11 - Do the same computation for “Long-Term Debt.�Ch. 11 - Prob. 5WE
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Edwards Construction currently has debt outstanding with a market value of $98,000 and a cost of 10 percent. The company has EBIT of $9,800 that is expected to continue in perpetuity. Assume there are no taxes. a-1. What is the value of the company's equity?  a-2. What is the debt-to-value ratio?  b. What are the equity value and debt-to-value ratio if the company's growth rate is 4 percent?  c. What are the equity value and debt-to-value ratio if the company's growth rate is 8 percent?arrow_forwardWhat is the size of debt for each firm? Assume that cost of debt = 8%; unlevered cost of capital = 10%; systematic risk of the asset is 1.5arrow_forwardGive typing answer with explanation and conclusion A company has an expected EBIT of $18,000 in perpetuity, a tax rate of 35%, and a debt-to- equity ratio of 0.75. The interest rate on the debt is 9.5%. The firm’s WACC is 9%. a) If the company has not debt, what would be the unlevered cost of capital and firm value? b) Suppose now the company has $55,714.29 in outstanding debt. Using your answer to part a) and M&M Proposition I with taxes, what is the value of this levered firm?arrow_forward
- Yang Centers wants to report at least $1.75 in earnings per share. Given the following information, how much debt should be in its capital structure? (Answer only in integers without $ sign.)            Book value per share:  $8.75            Cost of debt:               10 %            EBI: T                         $500,000            Tax bracket:                30 %            Total Capital:              $4,000,000 Answer:?????????arrow_forward​(Capital structure​ analysis)  The liabilities and​ owners' equity for Campbell Industries is found​ here:   LOADING... .  a.  What percentage of the​ firm's assets does the firm finance using debt​ (liabilities)? b.  If Campbell were to purchase a new warehouse for $1.1 million and finance it entirely with​ long-term debt, what would be the​ firm's new debt​ ratio? Accounts payable $519,000 Notes payable $248,000 Current liabilities $767,000 ​Long-term debt $1,101,000 Common equity $4,647,000 Total liabilities and equity $6,515,000arrow_forwardProblem 1 Assume that ABC Corporation earns a net income of 10 million for the current period. The corporation also needs Br 8 million for new investments for the next period. Suppose the target capital structure of debt to equity ratio is one to three ratios. Based on this, determine the amount of dividend to be paid based on the residual dividend policy? Beob omarrow_forward
- The firm's cost of debt is 9 percent, and the cost of retained earnings is 15 percent. However, if the firm exhausts its retained earnings of $236,780, the cost of equity rises to 15.9 percent. Currently management believes that the firm's current combination of 35 percent debt and 65 percent equity is the optimal capital structure.a. What is the firm's cost of capital if it uses only retained earnings?b. What is the firm's cost of capital if it uses new equity?c. How much total financing may the firm have before the marginal cost of capital rises?arrow_forwardA company has a 10% ROA. Assume that a company’s total assets equal total investedcapital, and that the company has no debt, so its total invested capital equalstotal equity. What are the company’s ROE and ROIC? (10%, 10%)arrow_forward13. Using Weighted Average Cost of Capital (WACC) ignoring taxes compute the cost of capital of a company with debt ratio of 0.75:1 and is paying yearly average interest for its loans of 4% and dividend rate of 5% yearly. a) 4.00% b) 4.25% c) 4.5% d) 5.00% 14. Using capital Asset Pricing Method (CAPM) compute for the cost of capital (equity) with risk free rate of 5%, market return of 12% and Beta of 1.3. a) 14.01% b) 14.10% c) 14.00% d) 14.11% 15. Using capital Asset Pricing Method (CAPM) compute for the cost of capital (equity) with risk free rate of 4%, market return of 8% and Beta of 1.5. a) 10.00% b) 11.00% c) 12.00% d) 13.00%arrow_forward
- Company X has a cost of equity of 16.31% and a pretax cost of debt of 7.8%. The debt-equity ratio is 0.56 and the tax rate is 21%. What is the unlevered cost of capital? A )14.01% b) 13.85% c) 13.70%  D) 14.08% E)14.26%arrow_forwardGive typing answer with explanation and conclusion  Suppose Abraxas Corp. has an equity cost of capital of 8.2%, market capitalization of $11.37 billion, and an enterprise value of $17.12 billion. Suppose Abraxas's debt cost of capital is 5.6% and its marginal tax rate is 21%. What is Abraxas's WACC?arrow_forwardSuppose your firm has a market value of equity is $500 million and a market value of debt is $475 million. What are the capital structure weights (i.e., weight of equity and weight of debt)? Group of answer choices A) weight of equity is 51.28%, , weight of debt is 48.72% B) weight of equity is 48.72%, , weight of debt is 51.28% C) weight of equity is 47.62%, , weight of debt is 52.38%arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
What is WACC-Weighted average cost of capital; Author: Learn to invest;https://www.youtube.com/watch?v=0inqw9cCJnM;License: Standard YouTube License, CC-BY