Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Chapter 18, Problem 7P
Acort Industries has 10 million shares outstanding and a current share price of $40 per share. It also has long-term debt outstanding. This debt is risk free, is four years away from maturity, has annual coupons with a coupon rate of 10%, and has a $100 million face value. The first of the remaining coupon payments will be due in exactly one year. The riskless interest rates for all maturities are constant at 6%. Acort has EBIT of $106 million, which is expected to remain constant each year. New capital expenditures are expected to equal depreciation and equal $13 million per year, while no changes to net working capital are expected in the future. The corporate tax rate is 40%, and Acort is expected to keep its debt-equity ratio constant in the future (by either issuing additional new debt or buying back some debt as time goes on).
- a. Based on this information, estimate Acort’s WACC.
- b. What is Acort’s equity cost of capital?
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A company has its debt structured as a single zero-coupon bond that matures in 5 years. The face value of the debt outstanding is $40 million and the current value of the company's total assets is $36 million. The standard deviation of the return of its assets is 30 percent per year, and the risk-free rate is estimated to be about 5 percent per year, compounded continuously.
Suppose this company has a new project opportunity available. This project has an estimated NPV of $3,000,000.
If the company undertakes the project, what will be the new market value of equity? Assume volatility is unchanged.
Assuming the company decided to undertake the new project and does not borrow any additional funds, what is the new continuously compounded cost of debt? Explain in detail the impact this project has on the cost of debt.
Acort Industries has 10 million shares outstanding and a current share price of $43 per share. It also has long-term debt outstanding. This debt is risk free, is four years away from maturity, has an annual coupon rate of 6%, and has a $111 million face value. The first of the remaining coupon payments
will be due in exactly one year. The riskless interest rates for all maturities are constant at 3.6%. Acort has EBIT of $92 million, which is expected to remain constant each year. New capital expenditures are expected to equal depreciation and equal $20 million per year, while no changes to net working
capital are expected in the future. The corporate tax rate is 26%, and Acort is expected to keep its debt-equity ratio constant in the future (by either issuing additional new debt or buying back some debt as time goes on).
a. Based on this information, estimate Acort's WACC.
b. What is Acort's equity cost of capital?
a. Based on this information, estimate Acort's WACC.
The WACC is%.…
Acort Industries has
8
million shares outstanding and a current share price of
$43
per share. It also has long-term debt outstanding. This debt is risk free, is four years away from maturity, has an annual coupon rate of
8%,
and has a
$106
million face value. The first of the remaining coupon payments will be due in exactly one year. The riskless interest rates for all maturities are constant at
4.8%.
Acort has EBIT of
$80
million, which is expected to remain constant each year. New capital expenditures are expected to equal depreciation and equal
$14
million per year, while no changes to net working capital are expected in the future. The corporate tax rate is
28%,
and Acort is expected to keep its debt-equity ratio constant in the future (by either issuing additional new debt or buying back some debt as time goes on).
a. Based on this information, estimate Acort's WACC.
b. What is Acort's equity cost of capital?
Question content area bottom
a. Based on this…
Chapter 18 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Ch. 18.1 - What are the three methods we can use to include...Ch. 18.1 - Prob. 2CCCh. 18.2 - Prob. 1CCCh. 18.2 - Prob. 2CCCh. 18.3 - Prob. 1CCCh. 18.3 - Prob. 2CCCh. 18.4 - Prob. 1CCCh. 18.4 - Prob. 2CCCh. 18.5 - How do we estimate a projects unlevered cost of...Ch. 18.5 - What is the incremental debt associated with a...
Ch. 18.6 - Prob. 1CCCh. 18.6 - Prob. 2CCCh. 18.7 - How do we deal with issuance costs and security...Ch. 18.7 - Prob. 2CCCh. 18.8 - When a firm has pre-determined tax shields, how do...Ch. 18.8 - Prob. 2CCCh. 18 - Prob. 1PCh. 18 - Prob. 2PCh. 18 - In 2015, Intel Corporation had a market...Ch. 18 - Prob. 4PCh. 18 - Suppose Goodyear Tire and Rubber Company is...Ch. 18 - Suppose Alcatel-Lucent has an equity cost of...Ch. 18 - Acort Industries has 10 million shares outstanding...Ch. 18 - Prob. 8PCh. 18 - Prob. 9PCh. 18 - Consider Alcatel-Lucents project in Problem 6. a....Ch. 18 - Consider Alcatel-Lucents project in Problem 6. a....Ch. 18 - In year 1, AMC will earn 2000 before interest and...Ch. 18 - Prokter and Gramble (PKGR) has historically...Ch. 18 - Amarindo, Inc. (AMR), is a newly public firm with...Ch. 18 - Remex (RMX) currently has no debt in its capital...Ch. 18 - You are evaluating a project that requires an...Ch. 18 - Prob. 17PCh. 18 - You are on your way to an important budget...Ch. 18 - Your firm is considering building a 600 million...Ch. 18 - Prob. 20PCh. 18 - DFS Corporation is currently an all-equity firm,...Ch. 18 - Prob. 22PCh. 18 - Prob. 23PCh. 18 - Prob. 24PCh. 18 - XL Sports is expected to generate free cash flows...Ch. 18 - Propel Corporation plans to make a 50 million...Ch. 18 - Gartner Systems has no debt and an equity cost of...Ch. 18 - Revtek, Inc., has an equity cost of capital of 12%...
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