EBK FUNDAMENTALS OF CORPORATE FINANCE
9th Edition
ISBN: 9781260049237
Author: BREALEY
Publisher: MCGRAW HILL BOOK COMPANY
expand_more
expand_more
format_list_bulleted
Concept explainers
Question
Chapter 13, Problem 14QP
a)
Summary Introduction
To compute: The WACC (weighted average cost of capital) of the company U.
b)
Summary Introduction
To discuss: Whether the company U make the accurate decision when its discount cash flows on the venture at the company’s WACC.
c)
Summary Introduction
To discuss: Whether the novel project be followed.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
←
CoffeeStop primarily sells coffee. It recently introduced a premium coffee-flavored liquor (BF Liquors). Suppose the firm faces a tax rate of 21%
and collects the following information. If it plans to finance 15% of the new liquor-focused division with debt and the rest with equity, what WACC
should it use for its liquor division? Assume a cost of debt of 4.5%, a risk-free rate of 3.5%, and a market risk premium of 5.2%.
% Debt
% Equity
96%
Coffee Stop
BF Liquors
4%
15%
85%
Note: Assume that the firm will always be able to utilize its full interest tax shield.
Beta
0.61
0.29
KIE
The weighted average cost of capital is%. (Round to two decimal places.)
A company is going to open a new division. The division will be financed with $1 million in debt
and $3 million in equity. The tax rate is 15% for all firms. The risk-free rate is 1% and market
portfolio return is 7%. The yield on the division's debt is 4%. The information on the relevant
pure play companies is given below:
Pure Play Firm
A
B
Beta
5.2
1.5
0.8
What is the new division's WACC?
Debt/Equity
0.6
0.2
(Efficiency analysis) ALei Industries has credit sales of $143 million a year ALef's management revwed ts anddei t is the maximum level of accounts receivable that ALei can carry and have a 45-day average colledtion period? Leis current accounts receivable collection period is 55 days, how much would it have lo reduce its level of accounts recelvable in oander to adi
a. What is the maximum level of accounts receivable that ALei can carry and have a 45-day average collection period?
b. The maximum level of accounts receivable vilbe smillion Round to one decimal place) The maximum level of accounts receivable will be S million.
Chapter 13 Solutions
EBK FUNDAMENTALS OF CORPORATE FINANCE
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
- DuraMax Inc. manufactures car radios and reported $ 75 million in operating income last year on revenues of $ 1 billion last year. The firm is all equity funded and you have computed a beta for the firm of 0.80. You have estimated the optimal debt ratio for the firm to be 40% debt, and you expect the firm to have S 20 million in interest expenses at that debt ratio. Using the interest coverage ratio table at the bottom of this page, estimate the cost of capital for DuraMax at the optimal debt ratio. The riskfree rate is 4%, the tax rate is 40% and the equity market risk premium is 4.82%. Interest Coverage Typical default spread 0.35% Ratio Rating AAA > 12.5 9.50 -12.50 AA 0.50% 7.50 - 9.50 6.00 – 7.50 4.50 - 6.00 A+ 0.70% 0.85% 1.00% BBB 1.50% 2.00% 4.00 – 4.50 3.50 – 4.00 BB+arrow_forwardCoffeeStop primarily sells coffee. It recently introduced a premium coffee-flavored liquor (BF Liquors). Suppose the firm faces a tax rate of 25% and collects the following information. If it plans to finance 10% of the new liquor-focused division with debt and the rest with equity, what WACC should it use for its liquor division? Assume a cost of debt of 5.1%, a risk-free rate of 3.3%, and a market risk premium of 6.3%. % Equity % Debt 96% 4% CoffeeStop BF Liquors 90% 10% Note: Assume that the firm will always be able to utilize its full interest tax shield. Beta 0.62 0.25 The weighted average cost of capital is %. (Round to two decimal places.)arrow_forwardCoffeeStop primarily sells coffee. It recently introduced a premium coffee-flavored liquor (BF Liquors). Suppose the firm faces a tax rate of 35% and collects the following information. If it plans to finance 15% of the new liquor-focused division with debt and the rest with equity, what WACC should it use for its liquor division? Assume a cost of debt of 4.8%, a risk-free rate of 2.1%, and a market risk premium of 6.3%. Beta % Equity % Debt 5% CoffeeStop BF Liquors 0.59 95% 0.23 85% 15% Note: Assume that the firm will always be able to utilize its full interest tax shield. The weighted average cost of capital is %. (Round to two decimal places.)arrow_forward
- Q. Western Lumber Company expects to have free cash flow in the coming year of $4.25mand is expected to grow at 4% per year thereafter. The company has an equity cost of10% and a debt cost of 6% and pays corporate tax at 30%. If the company maintains adebt-to-equity ratio of 0.50, what is the value of the interest tax shield? Please answer by providing step by step solution and explaining the whole processarrow_forwardSituational Software Co. (SSC) is trying to establish its optimalcapital structure. Its current capital structure consists of 25% debt and 75% equity;however, the CEO believes that the firm should use more debt. The risk-free rate, rRF,is 4%; the market risk premium, RPM, is 5%; and the firm’s tax rate is 40%. Currently,SSC’s cost of equity is 12%, which is determined by the CAPM. What would beSSC’s estimated cost of equity if it changed its capital structure to 40% debt and60% equity?arrow_forwardAssuming a perfect world without taxes. Home Decor has a debt ratio (D/V) of 2/5. The cost of equity is 14%, the cost of debt is 8%. The firm is considering increasing its leverage to a 2/3 debt ratio. What is the firm's cost of equity after the restructure? 17% 14% 18.8% 11.6%arrow_forward
- Hamada equation Original % debt in capital structure, wd Original % common equity in capital structure, wc Risk-free rate, TRF Market risk premium, RPM Tax rate, T Firm's cost of equity, rs Calculation of firm's current beta: Firm's current beta, b Calculation of firm's unlevered beta: Firm's unlevered beta, bu New % of debt in capital structure, Wd New New % of common equity in capital structure, Wc New Calculation of firm's new beta: Firm's new beta, bL New Calculation of firm's new cost of equity: Firm's new cost of equity, rs New 30.00% 70.00% 5.00% 7.00% 40.00% 14.00% 50.00% 50.00% Formulas #N/A #N/A #N/A #N/Aarrow_forwardNeed for External Financing To increase production capacity by 20%, a $5 million investment is needed. The firm wants to maintain a 40% debt-to-asset ratio, and continue to pay 25% of income as dividends. Net Income was $3 million. A. How much External Financing is needed? B. How much new Debt must they Issue? C. How much new external equity should they issue?arrow_forwardArnold Vimka is a venture capitalist facing two alternative investment opportunities. He intends to invest $1,000,000 in a start-up firm. He is nervous, however, about future economic volatility. He asks you to analyze the following financial data for the past year’s operations of the two firms he is considering and give him some business advice. Company Name Larson Benson Variable cost per unit (a) $ 18.00 $ 9.00 Sales revenue (8,900 units × $29.00) $ 258,100 $ 258,100 Variable cost (8,900 units × a) (160,200 ) (80,100 ) Contribution margin $ 97,900 $ 178,000 Fixed cost (24,700 ) (104,800 ) Net income $ 73,200 $ 73,200 Required Use the contribution margin approach to compute the operating leverage for each firm. If the economy expands in coming years, Larson and Benson will both enjoy a 11 percent per year increase in sales, assuming that the selling price remains unchanged. Compute the change in net income for…arrow_forward
- You are trying to value Lucid Motors using comparables analysis. You believe Lucid Motors should be valued similarly to TSLA and that TSLA is the only reasonable comparison. TSLA is currently trading at 10.7x Enterprise Value/Revenue. Lucid is expected to generate $2.2bn in revenues this year. How mucb should you be willing to value Lucid in terms of enterprise Value (assuming market is correct)? $20.6bn $23.5bn $15.4 bn $21.7 bnarrow_forwardSituational Software Co. (SSC) is trying to establish its optimal capital structure. Its current capital structure consists of 25% debt and 75% equity; however, the CEO believes that the firm should use more debt. The risk-free rate, faF, is 3%; the market risk premium, RPM, is 5%; and the firm's tax rate is 40%. Currently, SSC's cost of equity is 15%, which is determined by the CAPM. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below. Open spreadsheet What would be SSC's estimated cost of equity if it changed its capital structure to 50% debt and 50% equity? Round your answer to two decimal places. Do not round intermediate steps. Check My Work Reset Problem @om ईarrow_forwardSituational Software Co. (SSC) is trying to establish its optimal capital structure. Its current capital structure consists of 30% debt and 70% equity; however, the CEO believes that the firm should use more debt. The risk-free rate, FRF, is 5%; the market risk premium, RPM, is 5% ; and the firm's tax rate is 25%. Currently, SSC's cost of equity is 15%, which is determined by the CAPM. What would be SSC's estimated cost of equity if it changed its capital structure to 50% debt and 50% equity? Do not round intermediate Round your answer to two decimal places. calculations. % 4arrow_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
Capital Budgeting Introduction & Calculations Step-by-Step -PV, FV, NPV, IRR, Payback, Simple R of R; Author: Accounting Step by Step;https://www.youtube.com/watch?v=hyBw-NnAkHY;License: Standard Youtube License