PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 28, Problem 13PS
Summary Introduction
To compute: The ratio of debt to total long-term capital.
Summary Introduction
To compute: The
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A firm has a long-term debt–equity ratio of 0.50. Shareholders’ equity is $2.0 million. Current assets are $320,000, and total assets are $3.2 million. If the current ratio is 1.6, what is the ratio of debt to total long-term capital?
What is the size of debt for each firm?
Assume that cost of debt = 8%; unlevered cost of capital = 10%; systematic risk of the asset is 1.5
You have the following information on a company on which to base your calculations and discussion:
Cost of equity capital (rE) = 18.55%
Cost of debt (rD) = 7.85%
Expected market premium (rM –rF) = 8.35%
Risk-free rate (rF) = 5.95%
Inflation = 0%
Corporate tax rate (TC) = 35%
Current long-term and target debt-equity ratio (D:E) = 2:5
a. What are the equity beta (bE) and debt beta (bD) of the firm described above?[Hint: Assume that the above costs of capital have been generated by an appropriate equilibrium model.]
b. What is the weighted-average cost of capital (WACC) for this firm at the current debt-equity ratio?
c. What would the company’s cost of equity capital become if you unlevered the capital structure (i.e. reduced gearing until there is no debt)
Chapter 28 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 28 - Prob. 1PSCh. 28 - Performance measures Keller Cosmetics maintains an...Ch. 28 - Performance measures Table 28.8 gives abbreviated...Ch. 28 - Performance measures Describe some alternative...Ch. 28 - Financial ratios Look again at Table 28.8, which...Ch. 28 - Prob. 6PSCh. 28 - Financial ratios True or false? a. A companys...Ch. 28 - Financial ratios Sara Togas sells all its output...Ch. 28 - Financial ratios As you can see, someone has...Ch. 28 - Prob. 10PS
Ch. 28 - Prob. 11PSCh. 28 - Prob. 12PSCh. 28 - Prob. 13PSCh. 28 - Prob. 14PSCh. 28 - Prob. 15PSCh. 28 - Prob. 16PSCh. 28 - Prob. 17PSCh. 28 - Prob. 18PSCh. 28 - Prob. 19PSCh. 28 - Prob. 20PSCh. 28 - Prob. 21PSCh. 28 - Prob. 22PSCh. 28 - Prob. 23PSCh. 28 - Prob. 25PSCh. 28 - Prob. 26PSCh. 28 - Prob. 27PS
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- A firm has a return on assets of 12 percent and a return on equity of 18 percent. What is the debt-to-total assets ratio?arrow_forwardconsider a company with ROE of 14.5% and a profit margin of 6.5%. if the total asset turnover is 1.8 what is the firm's debt equity ratioarrow_forwardA firm has a return on assets of 7.8 percent and a cost of equity of 11.9 percent. What is the pretax cost of debt if the debt–equity ratio is .72? Ignore taxes.arrow_forward
- If a company’s debt-to-equity ratio is 40% calculate its debt-to-value and equity-to-value ratios. What is the dollar value of debt and equity if the market value of the company’s assets is $500 million? Show all calculationsarrow_forwardUsing the Du Pont method, evaluate the effects of the following relationships for the Butters Corporation. a. Butters Corporation has a profit margin of 5 percent and its return on assets (investment) is 22.5 percent. What is its assets turnover? (Round your answer to 2 decimal places.) b. If the Butters Corporation has a debt-to-total-assets ratio of 55.00 percent, what would the firm's return on equity be? (Input your answer as a percent rounded to 2 decimal places.) c. What would happen to return on equity if the debt-to-total-assets ratio decreased to 50.00 percent? (Input your answer as a percent rounded to 2 decimal places.)arrow_forwardA firm has a debt total asset ratio of 74 percent and a return on total assets of 13 percent. What is the return on equity?arrow_forward
- 4. A firm has a debt-total asset ratio of 75 percent, net income 20 million and total assetsAED 800 million What is the return on equity?arrow_forwardAssuming total invested capital = total assets, which of the following would have the highest equity multiplier? Enter question A. Company A with a debt to capital ratio of 80% B. Company B with a debt to capital ratio of 25% C. Company C with a debt to capital ratio of 60% D. Company D with a debt to capital ratio of 10%arrow_forwardUsing the DuPont method, evaluate the effects of the following relationships for the Butters Corporation. A.Butters Corporation has a profit margin of 5.5 percent and its return on assets (investment) is 8.75 percent. What is its assets turnover? Round your answer to 2 decimal places. ______ times B.If the Butters Corporation has a debt-to-total-assets ratio of 65.00 percent, what would the firm’s return on equity be? Note: Input your answer as a percent rounded to 2 decimal places. C.What would happen to return on equity if the debt-to-total-assets ratio decreased to 60.00 percent? Input your answer as a percent rounded to 2 decimal places.arrow_forward
- a company debt/ total assesses ratio of 25% and b company 20% with return on total assets of 10% and 7% respectively, which firm has a greater return on equity?? could find it for me?arrow_forwardif 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…arrow_forwardYou have the following ratios for a firm you're analyzing: Working capital / total assets = 0.7 Retained earnings / total assets = 0.3 EBIT / total assets = 0.2 market value of equity / book value of LT debt = 1.3 sales / total assets = 0.4 Calculate the firm's Z-score. Enterarrow_forward
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