PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
Chapter 19, Problem 9PS
WACC Nevada Hydro is 40% debt-financed and has a weighted-average cost of capital of 10.2%:
Goldensacks Company is advising Nevada Hydro to issue $75 million of
Goldensacks argues that these transactions would reduce Nevada Hydro’s WACC to 9.84%:
Do you agree with this calculation? Explain.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Hook Industrie's capital structure consists solely of debt and common equity. It can issue debt at 10% and its common stock currently pays a 52.50 dividend per share. The stock's price is currently $27.25, its dividend is expected to grow at a constabt rate of 5% per year, and its WACC is 12.15% What percentage of the company's capital structure consists of debt? The company is in the 30% tax bracket.
Skip question
Start Solving
Exit
↑
O
G
The board of directors of LuvMe Publishing Haus has commissioned a capital structure study. The company has a total assets of P59 million. It has earnings before interest and taxes (EBIT) of P9.0 million and is taxed at 25%. The stock has a book value of P25 per share.
Additional information follows:
Percentage of Debt
Cost of Debt
Required Rate of Return
0%
0%
10.0%
20%
8.5%
10.9%
30%
9.5%
11.5%
60%
15.0%
16.5%
Based on the above information using the debt ratio given, prepare the schedule to answer the following:
Earnings per share (EPS)
Return on Equity (ROE)
Price - Earnings ratio
David Ortiz Motors has a target capital structure of 40% debt and 60% equity. The yield to maturity on the company's outstanding bonds is 7%, and the company's tax rate is 25%. Ortiz's CFO has calculated the company's WACC as 9.3%. What is the company's cost of equity capital? Round your answer to the nearest whole number.
%
Chapter 19 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 19.A - The U.S. government has settled a dispute with...Ch. 19.A - You are considering a five-year lease of office...Ch. 19 - WACC True or false? Use of the WACC formula...Ch. 19 - WACC The WACC formula seems to imply that debt is...Ch. 19 - Prob. 3PSCh. 19 - Prob. 4PSCh. 19 - WACC Whispering Pines Inc. is all-equity-financed....Ch. 19 - WACC Table 19.3 shows a book balance sheet for the...Ch. 19 - WACC Table 19.4 shows a simplified balance sheet...Ch. 19 - Prob. 8PS
Ch. 19 - WACC Nevada Hydro is 40% debt-financed and has a...Ch. 19 - Flow-to-equity valuation What is meant by the...Ch. 19 - APV True or false? The APV method a. Starts with a...Ch. 19 - APV A project costs 1 million and has a base-case...Ch. 19 - APV Consider a project lasting one year only. The...Ch. 19 - APV Digital Organics (DO) has the opportunity to...Ch. 19 - Prob. 17PSCh. 19 - Prob. 18PSCh. 19 - Prob. 19PSCh. 19 - Prob. 20PSCh. 19 - Prob. 22PSCh. 19 - Company valuation Chiara Companys management has...Ch. 19 - Prob. 26PSCh. 19 - Prob. 27PS
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
- Whispering Pines Inc. is all-equity-financed. The expected rate of return on the company's shares is 9.65%. a. What is the opportunity cost of capital for an average-risk Whispering Pines investment? (Enter your answer as a percent rounded to 2 decimal places.) Opportunity cost of capital % b. Suppose the company issues debt, repurchases shares, and moves to a 24% debt-to-value ratio (D/ V = 0.24). What will be the company's weighted-average cost of capital at the new capital structure? The borrowing rate is 5.75% and the tax rate is 21%. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Weighted-average cost of capitalarrow_forwardDavid Ortiz Motors has a target capital structure of 40% debt and 60% equity. The yield to maturity of its outstanding long-term debt securities is 9% and its tax rate is 40%. Ortiz's CFO calculated the company's WACC to be 9.96%. Based on the information, what is the company's cost of equity?arrow_forwardCostaCap Corporation's capital structure (market value weights) consists of 50% common stock, 10% preferred stock, and 40% debt. The company's cost of common equity is 8%, it's cost of preferred equity is 5%, and it's pretax cost of debt is 3%. Costacap's tax rate is 25%. What is Costacap's weighted average cost of capital (WACC)? Group of answer choices 4.8% 5.1% 5.4% 5.7%arrow_forward
- David Ortiz Motors has a target capital structure of 40% debt and 60%equity. The yield to maturity on the company’s outstanding bonds is 9%,and the company’s tax rate is 40%. Ortiz’s CFO has calculated the company’s WACC as 9.96%. What is the company’s cost of equity capital?arrow_forwardFlaherty Electric has a capital structure that consists of 70 percent equity and 30 percent debt. The company’s long-term bonds have a before-tax yield to maturity of 8.4 percent. The company uses the DCF approach to determine the cost of equity. Flaherty’s common stock currently trades at RM40.50 per share. The year-end dividend (D1) is expected to be RM2.50 per share, and the dividend is expected to grow forever at a constant rate of 7 percent a year. The company estimates that it will have to issue new common stock to help fund this year’s projects. The company’s tax rate is 40 percent. What is the company’s weighted average cost of capital, WACC?arrow_forwardHook Industries capital structure consists solely of debt and common equity. It can issue debt at rd 5 11%, and its common stock currently pays a $2.00 dividend per share (D0 5 $2.00). The stock’s price is currently $24.75, its dividend is expected to grow at a constant rate of 7% per year, its tax rate is 35%, and its WACC is 13.95%. What percentage of the company’s capital structure consists of debt?arrow_forward
- James Madison Ltd. expects a net income of 200,000. The company has 5% of 1,000,000 bonds payable. The equity capitalization rate of the company is 20%. (a) Calculate the value of the firm and average cost of capital according to the net income approach (ignoring income tax).arrow_forwardJohnson Industries has a target capital structure that consists of 40 percent debt, 10 percent preferred stock, and 50 percent common stock. · The company can issue bonds at a yield to maturity of 7.5 percent. · The cost of preferred stock is 7 percent. · The company's common stock currently sells for $34 a share. · The company's dividend has just paid $2.00 a share (D0 = $2.00), and is expected to grow at a constant rate of 5 percent per year. · Assume that the flotation cost on debt and preferred stock is zero, and no new stock will be issued. · The company's tax rate is 30 percent. What is the company's weighted average cost of capital (WACC)? Express your answer in percentage (without the % sign) and round it to two decimal places.arrow_forwardThe return on assets for Super Express Ltd is 12.3% pa. Currently the capital structure for Super Express Ltd is 100% equity but management are considering issuing debt. Super Express Ltd has 34,400 shares on offer at a current price of $5.78 per share. Management wishes to issue enough debt capital to repurchase 35% of existing shares at the current share price. a)Calculate the amount of debt that the management of Super Express will be issuing. Give your answer in dollars to the nearest dollar. Debt issued = $ b)Calculate the debt to equity (leverage) ratio of Super Express Ltd after the debt issue. Give your answer rounded to 2 decimal places. Debt to equity ratio =arrow_forward
- XYZ Company has an existing capital structure mix of Debt 35%, preferred stock 15% and Common Stock 50%. a) Calculate Cost of Debt, if the cost of debt is 6% (effective rate) and its tax rate is 40% then what is the after-tax cost of debt? b) Calculate the Cost of preferred stock, if the market price for preferred stock is $100 per share, with a stated dividend of $10. c) Calculate Cost of Equity if Beta is 1.5 and the risk-free rate on a treasury bill is currently 5% and the market return has averaged 10%. d) Calculate Weighted Average Cost of capital for XYZ Companyarrow_forwardSouthern Corporation has a capital structure of 40% debt and 60 % common equity. This capital structure is expected not to change. The firm's tax rate is 21%. The firm can issue the following securities to finance capital investments: Debt: Capital can be raised through bank loans at a pretax cost of 6.7%. Also, bonds can be issued at a pretax cost of 8.2%. D Common Stock: Retained earnings will be available for investment. In addition, new common stock can be issued at the market price of $74. Flotation costs will be $4 per share. The recent common stock dividend was $4,33. Dividends are expected to grow at 4% in the future. What is the cost of external equity? PLEASE INPUT THE ANSWER IN PERCENT ROUNDING IT TO 2 DECIMALS. DO NOT INCLUDE % SIGN, E.G.. INSTEAD OF 9.9922% INPUT 9.99arrow_forwardYou are given the following information for Lighting Power Company. Assume the company's tax rate is 25 percent. Debt: Common stock: 430,000 shares outstanding, selling for $61 per share; the beta is 1.12. 18,500 shares of 3.7 percent preferred stock outstanding, a $100 par value, currently selling for $82 per share. 6 percent market risk premium and 4.7 percent risk-free rate. What is the company's WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g.. 32.16.) Preferred stock: Market: 10,000 5.9 percent coupon bonds outstanding. $1,000 par value, 25 years to maturity, selling for 107 percent of par; the bonds make semiannual payments. WACC %arrow_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
Working capital explained; Author: The Finance Storyteller;https://www.youtube.com/watch?v=XvHAlui-Bno;License: Standard Youtube License