Question

Firm Why has a capital structure based on market values of 40 percent debt and the rest common equity. You know that the coupon rate on the debt is 8 percent and the yield to maturity on the debt is 9.3 percent. You also know that the common equity beta is 1.54, the market risk premium is 5.5 percent and the risk-free rate is 2 percent, and the tax rate is 40 percent. Find Firm Why's WACC. Input your answer as a decimal rounded to four places.

Answer #1

Debt % (of total capital) = 40%, Equity % (of total capital) = 60%.

Cost of Equity (by CAPM) = R_{f} + (B * R_{p});
where R_{f} is risk free rate (2%), Beta (B) is 1.54,
R_{p} is Market Risk premium which is 5.5% here. Hence Cost
of Equity in this question = 2% + (1.54 * 5.5%) = 10.47%

Cost of Debt is calculated using YTM **(and not coupon
rate)**.

Post tax cost of debt = Pretax Cost of Debt * (1 - tax Rate) = 9.3% * (1 - 40%) = 5.58%

WACC = weighted average (post tax) cost of debt and cost of equity.

= (40% * 5.58%) + (60% * 10.47%) = **8.51%**

Bradshaw Steel has a capital structure with 30% debt (all
long-term bonds) and 70% common equity. The yield to maturity on
the company’s long-term bonds is 8%, and the firm estimates that
its overall composite WACC is 10%. The risk-free rate of interest
is 5.5%, the market risk premium is 5%, and the company’s tax rate
is 40%. Bradshaw uses the CAPM to determine its cost of equity.
What is the beta on Bradshaw’s stock? and what is the
interpretation...

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...

Preston Corp. is estimating its WACC. Its target capital
structure is 20 percent debt, 20 percent preferred stock, and 60
percent common equity. Its bonds have a 12 percent coupon, paid
semiannually, a current maturity of 20 years, and sells for $1,100.
The firm could sell, at par, $100 preferred stock which pays a 5.46
percent annual dividend, but flotation costs of 5 percent would be
incurred. Preston's beta is 1.2, the risk-free rate is 3 percent,
and the market...

Your company has a target capital structure of 40% debt, 15%
preferred, and 45% common equity. Your bonds carry a 9% coupon,
have a par value of $1,000, and 7 years remaining until maturity.
They are currently selling for $950.51. The cost of preferred is
7.50%. The risk free rate is 4%, the market risk premium is 8%, and
beta is 1.0. The firm will not be issuing any new stock, and the
tax rate is 40%. What is its...

Red Dirt Industries has a capital structure made up of 25
percent debt and 75 percent common equity. Red Dirt’s bonds have a
$1,000 par value, a 12 percent coupon, paid semiannually, a current
maturity of 20 years, and sell for $1,025. Red Dirt’s beta is 2.2,
the risk-free rate is 3 percent, and the market risk premium is 6
percent. Red Dirt just paid a dividend of $2.00. The firm’s stock
price is $18.00. The firm's marginal tax rate...

Rollins Corporation is estimating its WACC. Its target capital
structure is 20 percent debt, 20 percent preferred stock, and 60
percent common equity. Its bonds have a 7.5 percent coupon, paid
semiannually, a current maturity of 20 years, and sell for
$1,105.78. The firm could sell, at par, $100 preferred stock which
pays a 8 percent annual dividend, but flotation costs of 5 percent
would be incurred. Rollins' beta is 1.8, the risk-free rate is 2.45
percent, and the market...

Rollins Corporation is estimating its WACC. Its target capital
structure is 20 percent debt, 20 percent preferred stock, and 60
percent common equity. Its bonds have a 12 percent coupon rate paid
semiannually, a current maturity of 20 years, and a price of
$1,000. The firm could sell preferred stock dividends at $12 with a
price of $100. Rollins's beta is 1.2, the risk-free rate is 11
percent, and the market risk premium is 5 percent. Rollins is a
constant-growth...

Preston Corp. is estimating its WACC. Its target capital
structure is 20 percent debt, 20 percent preferred stock, and 60
percent common equity. Its bonds have a 12 percent coupon, paid
semiannually, a current maturity of 20 years, and sells for $1,100.
The firm could sell, at par, $100 preferred stock which pays a 7.74
percent annual dividend, but flotation costs of 5 percent would be
incurred. Preston's beta is 1.2, the risk-free rate is 3 percent,
and the market...

Testbank, Question 14 A firm has a capital structure that uses
45 percent equity, 20 percent preferred shares, and 35 percent
debt. The preferred shares have a current yield of 5.5 percent. The
debt has a coupon rate of 10 percent and a current yield to
maturity of 6.5 percent. The common shares have a yield of 8
percent. The tax rate is 25 percent. What is the firm’s WACC?
5.231% 6.700% 6.406% 6.975%

Testbank, Question 12 A firm has a capital structure that uses
45 percent equity, 20 percent preferred shares, and 35 percent
debt. The preferred shares have a current yield of 5.5 percent. The
debt has a coupon rate of 10 percent and a current yield to
maturity of 6.5 percent. The common shares have a yield of 8
percent. There are no taxes. What is the firm’s WACC? 6.575% 6.975%
7.275% 8.200%

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 6 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago