Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Chapter 14, Problem 16PS
Here are data On two Firms:
| Equity ($ million) | Debt ($ million) | ROC(%) | Cost of capital | |
| Acme |
|
|
|
|
| Apex |
|
|
|
|
a. Which firm has the higher economic value added?
b. Which has higher economic value added per dollar of invested Capital?
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Consider the following data for the firms Acme and Apex:
Acme
Apex
Required:
Equity
Debt
($ million) ($ million)
210
1,050
105
350
ROC
Cost of Capital
(*)
(%)
17%
9%
15%
10%
a-1. Calculate the economic value added for Acme and Apex.
a-2. Which firm has the higher economic value added?
b-1. Calculate the economic value added per dollar of invested capital for Acme and Apex.
b-2. Which firm has the higher economic value added per dollar of invested capital?
Answer is not complete.
Complete this question by entering your answers in the tabs below.
Required A1 Required A2 Required B1
Required B2
Calculate the economic value added for Acme and Apex.
Note: Enter your answers in millions rounded to 2 decimal places.
Economic value added for Acme
million
Economic value added for Apex
million
if A firm's current balance sheet is as follows:
Assets $100 Debt $10
Equity $90
a. what is the firm's weighted-average cost of capital at various combinations of debt and equity, given the following information?
Debt/assets after-tax cost of Debt cost of equity cost of capital
0% 8% 12% ?
10 8 12 ?
20 8 12 ?
30 8 13 ?
40 9 14 ?
50 10…
Calculate the Weighted Average Cost of Capital (WACC) for McCormick and Company using the formula WACC = (WD x RD x (1-T)) + (WS x Rs)
Note that --
Rs = the cost of equity
Rd = the cost of debt
T = the tax rate
WD = Value of debt / (Value of debt plus value of equity)
WS = Value of equity / (Value of debt plus value of equity) **Note that the weight of debt plus the weight of equity must total to 100%, as there are only two components in the capital structure.**
In order to estimate the weights of debt and equity in the total capital structure, the CFO suggests using the book value of debt and the market value of equity. To determine the book value of debt, use data from the year end November 2019 McCormick 10-K. Look on the Balance sheet and add the following -- Short term borrowings, Current portion of long term debt, and Long term debt. To determine the market value of equity, use the following data: On March 17, 2020 the market value of equity (or "Market Cap")…
Chapter 14 Solutions
Essentials Of Investments
Ch. 14 - Prob. 1PSCh. 14 - Prob. 2PSCh. 14 - The Crusty Pie Co., which specializes in apple...Ch. 14 - The ABC Corporation has a profit margin on sales...Ch. 14 - A company’s current ratio is 2. If the company...Ch. 14 - Cash flow from investing activities excludes:...Ch. 14 - Cash flow from operating activities includes:...Ch. 14 - Prob. 8PSCh. 14 - Prob. 9PSCh. 14 - Prob. 10PS
Ch. 14 - Prob. 11PSCh. 14 - Use the DuPont system and the following data to...Ch. 14 - A firm has an ROE of 3 , a debt/equity ratio of...Ch. 14 - A firm has a tax burden ratio of 0.75 , a leverage...Ch. 14 - A11 analyst gathers the following information...Ch. 14 - Here are data On two Firms: LO142 Equity ($...Ch. 14 - Prob. 1CPCh. 14 - Which of the following best explains a ratio of...Ch. 14 - Use the Financial statements for Chicago...Ch. 14 - Prob. 4CPCh. 14 - The information in the following table comes from...Ch. 14 - Scott Kelly is reviewing Master Toy’s financial...Ch. 14 - The DuPont formula defines the net return on...Ch. 14 - Go to finance.yahoo.com to find information about...Ch. 14 - Answer the following questions for these two toy...Ch. 14 - Prob. 3WM
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- To 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 = $22.50; and gL = 6.50% (constant). Based on the dividend growth approach, what is the cost of common from reinvested earnings? O a. 13.59% O b. 12.94% c 11.10% d. 12.30% e. 11.68% Oarrow_forward13. Using Weighted Average Cost of Capital (WACC) ignoring taxes compute the cost of capital of a company with debt ratio of 0.75:1 and is paying yearly average interest for its loans of 4% and dividend rate of 5% yearly. a) 4.00% b) 4.25% c) 4.5% d) 5.00% 14. Using capital Asset Pricing Method (CAPM) compute for the cost of capital (equity) with risk free rate of 5%, market return of 12% and Beta of 1.3. a) 14.01% b) 14.10% c) 14.00% d) 14.11% 15. Using capital Asset Pricing Method (CAPM) compute for the cost of capital (equity) with risk free rate of 4%, market return of 8% and Beta of 1.5. a) 10.00% b) 11.00% c) 12.00% d) 13.00%arrow_forwardConsider the following data for the firms Acme and Apex: Equity ($ million) Debt ($ million) ROC Cost of Capital Acme 290 145 17% 9% Apex 1,450 483 15% 10% a. Calculate the economic value added for Acme and Apex (round to 2 decimal places). Economic value added for Acme $? million Economic value added for Apex $? million b. Calculate the economic value added per dollar of invested capital for Acme and Apex (round to 2 decimal places)? Economic value added for Acme per dollar Economic value added for Apex per dollararrow_forward
- Based on the key indicators tabulated in the table below and the readings and resources provided for this unit, analyze Firm A and Firm B thoroughly. Which firm in your opinion is more attractive, and why? Firm A Firm B P/E ratio 3 3 EPS growth rate +10 -20 Debt-to-equity ratio 0.30 0.70 Sales ($ million) 100 100 Cash on the balance sheet ($ million) 20 2arrow_forward6. Calculate and explain the Weighted Average Cost of Capital (WACC)based on the details below.a. Market Value of Equity: $7Mb. Market Value of Debt: $3Mc. Cost of equity 7%d. Cost of debt: 5%e. Tax Rate: 32 (use .32 for calculation)arrow_forwardM12-15. Estimating Cost of Equity Capital Assume that a company’s market beta equals 0.6, the risk-free rate is 5%, and the market return equals 13%. Compute the company’s cost of equity capital. Round answer to one decimal place (ex: 0.0245 = 2.5%) Answer%arrow_forward
- What is the cost of equity for a firm where the required return on assets is 15.71%, the cost of debt is 6.92%, and the target debt/equity ratio is 1.19? Ignore taxes. O A) 19.05%arrow_forwardScanlon Inc.'s CFO hired you as a consultant to help her estimate the cost of capital. You have been provided with the following data: rRF = 4.10%; RPM =5.20%; and b = 0.70. Based on the CAPM approach, what is the cost of equity from retained earnings? O a. 10.00% O b. 8.07% O c. 9.30% O d. 7.74% O e. 6.51%arrow_forwardA company hired you as a consultant to help estimate its cost of capital. You have obtained the following data: D0 = $2.45; P0 = $28.96; and g = 4.06% (constant). What is the cost of equity from retained earnings? Do not round your intermediate calculations. Express your answer as a percent rounded to two decimal places. (For example, 4.567% should be entered as 4.57)arrow_forward
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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