EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Bolero Corporation has one long term loan (interest bearing debt) of $700,000 at an interest rate of 8%. The company has accounts payable of $300,000 (non-interest bearing) and equity of $1,000,000. It estimates that its cost of equity is 16%. Its tax rate is 35%.
A. What is the company’s weighted average cost of capital on interest bearing debt and equity?
B. What is Bolero Corporation’s weighted average cost of capital on all liabilities and equity (or total invested capital)?
McGee Corporation has fixed operating costs of $14 million and a variable cost ratio of 0.60. The firm has a $16 million, 8 percent bank loan and a $4 million, 13 percent bond issue outstanding. The firm has 0.8 million shares of $5 (dividend) preferred stock and 2.9 million shares of common stock ($1 par). McGee’s marginal tax rate is 40 percent. Sales are expected to be $120 million.
Compute McGee’s degree of operating leverage at an $120 million sales level. Round your answer to two decimal places.
Compute McGee’s degree of financial leverage at an $120 million sales level. Round your answer to two decimal places.
If sales decline to $114 million, forecast McGee’s earnings per share. Round your answer to the nearest cent.$
Here is Icknield’s market-value balance sheet (figures in $ millions):
Net working capital
$550
Debt
$800
long term assets
$2,150
Equity
$1,900
value of firm
$2,700
$2,700
The debt is yielding 7%, and the cost of equity is 14%. The tax rate is 21%. Investors expect this level of debt to be permanent.
a. What is Icknield’s WACC?
b. How would the market-value balance sheet change if Icknield retired all its debt?
Chapter 14 Solutions
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Ch. 14.A - Prob. 1QTDCh. 14.A - Prob. 2QTDCh. 14.A - Prob. 3QTDCh. 14.A - Prob. 2PCh. 14.A - Prob. 3PCh. 14.A - Prob. 4PCh. 14.A - Prob. 5PCh. 14.A - Prob. 6PCh. 14.A - Prob. 7PCh. 14.A - Prob. 8P
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