PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 17, Problem 22PS
After-tax WACC Gamma Airlines has an asset beta of L.5. The risk-free interest rate is 6%, and the market risk premium is 8%. Assume the
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Here are data on two companies. The T-bill rate is 4% and the market risk premium is 6%.
Company
$1 Discount Store
Everything $5
Forecasted return
12%
11%
Standard deviation of returns
8%
10%
Beta
1.5
1.0
What would be the fair return for each company according to the capital asset pricing model (CAPM)?
Alpha Inc.'s beta coefficient is 1.4, the risk-free rate is 10 percent, and the market risk premium is 5 percent. Based on the capital asset
pricing model (CAPM), what should be Alpha's cost of retained earnings?
11%
17%
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12%
Chapter 17 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 17 - Homemade leverage Ms. Kraft owns 50,000 shares of...Ch. 17 - Homemade leverage Companies A and B differ only in...Ch. 17 - Corporate leverage Suppose that Macbeth Spot...Ch. 17 - Corporate leverage Reliable Gearing currently is...Ch. 17 - MMs propositions True or false? a. MMs...Ch. 17 - MMs propositions What is wrong with the following...Ch. 17 - Prob. 7PSCh. 17 - MM proposition 1 Executive Cheese has issued debt...Ch. 17 - Prob. 9PSCh. 17 - Prob. 10PS
Ch. 17 - MM proposition 2 Spam Corp. is financed entirely...Ch. 17 - MM proposition 2. Increasing financial leverage...Ch. 17 - Prob. 13PSCh. 17 - MM proposition 2 Look back to Section 17-1....Ch. 17 - MM proposition 2 Hubbards Pet Foods is financed...Ch. 17 - MM proposition 2 Imagine a firm that is expected...Ch. 17 - MM proposition 2 Archimedes Levers is financed by...Ch. 17 - MM proposition 2 Look back to Problem 17. Suppose...Ch. 17 - Prob. 19PSCh. 17 - After-tax WACC Gaucho Services starts life with...Ch. 17 - After-tax WACC Omega Corporation has 10 million...Ch. 17 - After-tax WACC Gamma Airlines has an asset beta of...Ch. 17 - Prob. 23PSCh. 17 - Investor choice People often convey the idea...Ch. 17 - Investor choice Suppose that new security designs...
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- Calculate the cost of equity with the CAPM Calculate the cost od debt based on what the company is currently paying for its debt - Beta of the industry = 1.16 - Equity Risk Premium = 6.97% - Risk-free rate = 3.77% - Objective capital structure of the industry = 13.24%arrow_forward1.a. Austin Metal Company reported Current Assets of $209,000 and Current Liabilities of $110,000. Calculate working capital and explain the results 1.b. The Company DEN has a beta of 1.30. The risk-free rate of return is 1.90 percent and the market rate of return is 5.10 percent. What is the CAPM cost of equity? kindly explain in detailarrow_forwardThe following data refers to Company Z: - Beta = 1.7 - Required return on debt (yield to maturity on a long term bond) = 3.1% - Tax rate = 21% - 30-year government bond = 2.3% - Market risk premium can be assumed to be 5% Estimate the cost of capital (WACC) for Company Z.arrow_forward
- Here are data on two companies. The T-bill rate is 4% and the market risk premium is 6%. Company $1 Discount Store Everything $5 Forecast return 12% 11% Standard deviation of returns 8% 10% Beta 1.5 1.0 What would be the fair return for $1 Discount Store according to the capital asset pricing model (CAPM)? Enter your answer as a decimal.arrow_forward1.a. Austin Metal Company reported Current Assets of $209,000 and Current Liabilities of $110,000. Calculate working capital and explain the results 1.b. The Company DEN has a beta of 1.30. The risk-free rate of return is 1.90 percent and the market rate of return is 5.10 percent. What is the CAPM cost of equity?arrow_forwardCapital Asset Pricing Model (CAPM) - Based on Market Risk Premium Risk free rate (Rf)* 3.00% Beta (B)* Market risk premium* Expected return (ER) 1.50 10.00%arrow_forward
- Start Ltd. has an asset beta 1.17 and a target debt-equity ratio of 1/3. If its debt beta is 0.1, what is its equity beta?arrow_forwardYou have the following initial information on which to base your calculations and discussion: Debt yield = 2.5% Required Rate of Return on Equity = 13% Expected return on S&P500 = 8% Risk-free rate (rF) = 1.5% Inflation = 2.5% Corporate tax rate (TC) = 30% Current long-term and target debt-equity ratio (D:E) = 1:3 a. What is the unlevered cost of equity (rE*) for this firm? Assume that the management of the firm is considering a leveraged buyout of the above company. They believe that they can gear the company to a higher level due to their ability to extract efficiencies from the firm’s operations. Thus, they wish to use a target debt-equity ratio of 3:1 in their valuation calculations. b. What would the levered cost of equity equal for this firm at a debt-equity ratio (D:E) of 3:1? c. What would the required rate of return for the company equal if it were to be acquired under the leveraged buyout structure (i.e., what would the estimated firm WACC equal to under a…arrow_forwardYou have the following initial information on which to base your calculations and discussion: Debt yield = 2.5% Required Rate of Return on Equity = 13% Expected return on S&P500 = 8% Risk-free rate (rF) = 1.5% Inflation = 2.5% Corporate tax rate (TC) = 30% Current long-term and target debt-equity ratio (D:E) = 1:3 a. What is the unlevered cost of equity (rE*) for this firm? Assume that the management of the firm is considering a leveraged buyout of the above company. They believe that they can gear the company to a higher level due to their ability to extract efficiencies from the firm’s operations. Thus, they wish to use a target debt-equity ratio of 3:1 in their valuation calculations.arrow_forward
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