EBK CFIN
6th Edition
ISBN: 9781337671743
Author: BESLEY
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 12, Problem 9PROB
Summary Introduction
Optimal capital structure:
Optimal capital structure is capital structure at which market price of the firm is highest.
Here, question has different proportion of debt, earnings per share and stock price is given
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Using the following information for Handy Hardware, determine the capital structure that results in the lowest weighted average cost of capital (WACC) for the firm. Explain your answer. (LO 12-2) Proportion of Debt Proportion of Debt 10% 30 50 Earnings per Share (EPS) Earnings per Share (EPS) $3.85 3.98 4.10 Stock Price, Po Stock Price, Po $95.40 97.25 96.80
The basic WACC equation
The calculation of a weighted average cost of capital (WACC) involves calculating the weighted average of the required rates of return on debt and equity, where the weights equal the percentage of each type of financing in the firm’s overall capital structure.
what is the symbol that represents the cost of preferred stock in the weighted average cost of capital (WACC) equation.__________
Bob Co. has $1.26 million of debt, $3.16 million of preferred stock, and $2.02 million of common equity. The appropriate weight of the firm's preferred stock in the calculation of the company's weighted average cost of capital is____________% .
The calculation of WACC involves calculating the weighted average of the required rates of return on debt, preferred stock, and common equity, where the weights equal the percentage of each type of financing in the firm’s overall capital structure.
Q1. ________is the symbol that represents the cost of preferred stock in the weighted average cost of capital (WACC) equation.
Q2. Avery Co. has $3.9 million of debt, $2 million of preferred stock, and $2.2 million of common equity. What would be its weight on debt?
a. 0.27
b. 0.25
c. 0.48
d. 0.20
Q1. Option 1 rS or Option 2 rD or Option 3 rP or Option 4 rE
Please provide the correct answers. Thank you!
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- The basic WACC equation The calculation of WACC involves calculating the weighted average of the required rates of return on debt, preferred stock, and common equity, where the weights equal the percentage of each type of financing in the firm’s overall capital structure. is the symbol that represents the cost of preferred stock in the weighted average cost of capital (WACC) equation. Raymond Co. has $1.4 million of debt, $3 million of preferred stock, and $1.2 million of common equity. What would be its weight on debt? 0.59 0.25 0.49 0.21arrow_forwardAssume 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%…arrow_forwardTo help them estimate the company's cost of capital, Smithco has hired you as a consultant. You have been provided with the following data: D₁ = $1.45; Po = $22.50; and gL = 6.50% (constant). Based on the dividend growth approach, what is the cost of common from reinvested earnings? O a. 13.59% O b. 12.94% c 11.10% d. 12.30% e. 11.68% Oarrow_forward
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