Question

RLS has 30% debt in its capital structure. Currently, the levered equity beta is 1 and the debt beta is 0. The T-bill rate is 4% and the expected return on the market is 14%. The firm plans to issue additional debt. The debt moves the firm to its target debt level of 40%. What is the new return on equity?

Answer #1

Proper solution is given.

US Robotics Inc. has a current capital structure of 30% debt and
70% equity. Its current before-tax cost of debt is 6%, and its tax
rate is 25%. It currently has a levered beta of 1.10. The risk-free
rate is 3%, and the risk premium on the market is 7.5%. US Robotics
Inc. is considering changing its capital structure to 60% debt and
40% equity. Increasing the firm’s level of debt will cause its
before-tax cost of debt to increase...

7. David Ortiz Motors has a target capital structure of 20%
debt and 80% equity. The yield to maturity on the company’s
outstanding bonds is 5.7%, and the company’s tax rate is 23%.
Ortiz’s CFO has calculated the company’s WACC as 10.45%. What is
the company’s cost of equity capital?
8. On January 1, the total market value of the Tysseland
Company was $60 million. During the year, the company plans to
raise and invest $30 million in new projects....

. Firm Green’s capital structure is 30% debt and 70% equity and
firm Yellow’s capital structure is 50% debt and 50% equity. Both
firms pay 6% annual interest on their debt. Firm Green’s shares
have a beta of 1.0 and Firm Yellow’s a beta of 1.5. The risk-free
interest rate is 3%, and the expected return on the market
portfolio equals 8%.
(c) Discuss the impact of corporate taxes on the optimal capital
structure of the firm in an otherwise...

4. Determining the optimal capital
structure
US Robotics Inc. has a current capital structure of 30% debt and
70% equity. Its current before-tax cost of debt is 8%, and its tax
rate is 25%. It currently has a levered beta of 1.10. The risk-free
rate is 2.5%, and the risk premium on the market is 7.5%. US
Robotics Inc. is considering changing its capital structure to 60%
debt and 40% equity. Increasing the firm’s level of debt will cause
its...

Dunkin currently has a capital structure of 60 percent debt and
40 percent equity, but is considering a new product that will be
produced and marketed by a separate division. The new division will
have a capital structure of 80 percent debt and 20 percent equity.
Dunkin has a current beta of 2.1, but is not sure what the beta for
the new division will be. AMX is a firm that produces a product
similar to the product under consideration...

Boxcars, Inc. has a capital structure consisting of $100MM in
equity and $150MM in debt. With this capital structure, the
expected return to its equity is 18 percent, the expected return to
its debt is 7 percent, and the market beta of Boxcars enterprise
value is 1.68. The risk-free rate is 3 percent. The firm
unexpectedly issues $110MM in new shares, using the cash to
repurchase $110MM of its debt. After the repurchase, the remaining
$40MM in debt is risk-free...

Company TNT currently has zero debt in its capital structure, a
total market value of $60 million, and an equity beta of 0.75. The
company is considering a new capital structure, by issuing $25
million worth of debt and using the proceeds to buy back $25
million worth of equity (no impact on the firms total market
value). The company’s corporate tax rate is 30%. Risk free rate is
6% and market return is 14%. How much would be the...

Boxcars, Inc. has a capital structure consisting of $100MM in
equity and $150MM in debt. With this capital structure, the
expected return to its equity is 18 percent, the expected return to
its debt is 7 percent, and the market beta of Boxcars enterprise
value is 1.68. The risk-free rate is 3 percent. The firm
unexpectedly issues $110MM in new shares, using the cash to
repurchase $110MM of its debt. After the repurchase, the remaining
$40MM in debt is risk-free...

A levered firm has a target capital structure of 30 percent debt
and 70 percent equity. The aftertax cost of debt is 5.1 percent,
the tax rate is 35 percent, and the cost of equity is 13.1 percent.
The firm is considering a project that is equally as risky as the
overall firm. The project has an initial cash outflow of $1.2
million and annual cash inflows of $516,000 at the end of each year
for 3 years. What is...

Mark IV Industries' current debt to equity ratio is 0.4; it has
a (levered) equity beta of 1.4, and a cost of equity 15.2%.
Risk-free rate is 4%, the market risk premium is 8%, the cost of
debt is 4%, and the corporate tax rate is 34%. The firm is in a
matured business, ie. it is not growing anymore. It has long-term
debt outstanding that is rolled over when it matures, so that the
amount of debt outstanding does...

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