Question

**Quantitative
Problem:** Currently, Meyers Manufacturing Enterprises (MME)
has a capital structure consisting of 35% debt and 65% equity.
MME's debt currently has a 7.4% yield to maturity. The risk-free
rate (r_{RF}) is 5.4%, and the market risk premium
(r_{M} – r_{RF}) is 6.4%. Using the CAPM, MME
estimates that its cost of equity is currently 11%. The company has
a 40% tax rate.

a. What is MME's
current WACC? Round your answer to 2 decimal places. Do not round
intermediate calculations.

____%

b. What is the current beta on MME's common stock? Round your answer to 4 decimal places. Do not round intermediate calculations.

c. What would MME's
beta be if the company had no debt in its capital structure? (That
is, what is MME's unlevered beta, b_{U}?) Round your answer
to 4 decimal places. Do not round intermediate calculations.

MME's financial staff is considering changing its capital structure to 45% debt and 55% equity. If the company went ahead with the proposed change, the yield to maturity on the company's bonds would rise to 7.9%. The proposed change will have no effect on the company's tax rate.

d. What would be the
company's new cost of equity if it adopted the proposed change in
capital structure? Round your answer to 2 decimal places. Do not
round intermediate calculations.

____%

e. What would be the
company's new WACC if it adopted the proposed change in capital
structure? Round your answer to 2 decimal places. Do not round
intermediate calculations.

____%

Answer #1

a) WACC = W_{d}*K_{d}*(1-t) +
W_{e}*K_{e} = 0.35*7.4%*(1-0.4) + 0.65*11% =
8.70%

b) Cost of equity = Risk free rate + Beta*Market risk premium

11% = 5.4% + Beta*6.4%

Beta = 0.8750

c) Unlevered beta = Levered Beta/(1+(1-t)*D/E) = 0.8750/(1+(1-0.4)*0.35/0.65) = 0.6613

d) New levered beta = Unlevered beta * (1+(1-t)*D/E) = 0.6613*(1+(1-0.4)*0.45/0.55) = 0.9859

Cost of equity = Risk free rate + Beta*Market risk premium = 5.4% + 0.9859*6.4% = 11.71%

e) WACC = W_{d}*K_{d}*(1-t) +
W_{e}*K_{e} = 0.45*7.9%*(1-0.4) + 0.55*11.71% =
8.57%

Quantitative Problem: Currently, Meyers
Manufacturing Enterprises (MME) has a capital structure consisting
of 35% debt and 65% equity. MME's debt currently has a 7.2% yield
to maturity. The risk-free rate (rRF) is 5.2%, and the
market risk premium (rM – rRF) is 6.2%. Using
the CAPM, MME estimates that its cost of equity is currently 12.3%.
The company has a 25% tax rate.
a. What is MME's current WACC? Do not round intermediate
calculations. Round your answer to two decimal...

Quantitative Problem:
Currently, Meyers Manufacturing Enterprises (MME) has a capital
structure consisting of 35% debt and 65% equity. MME's debt
currently has a 6.6% yield to maturity. The risk-free rate (rRF) is
4.6%, and the market risk premium (rM – rRF) is 5.6%. Using the
CAPM, MME estimates that its cost of equity is currently 12.9%. The
company has a 40% tax rate.
a. What is MME's current WACC? Do not round intermediate
calculations. Round your answer to two decimal...

Currently, Meyers Manufacturing Enterprises (MME) has a capital
structure consisting of 35% debt and 65% equity. MME's debt
currently has a 6.9% yield to maturity. The risk-free rate
(rRF) is 4.9%, and the market risk premium
(rM – rRF) is 5.9%. Using the CAPM, MME
estimates that its cost of equity is currently 12.8%. The company
has a 40% tax rate.
a. What is MME's current WACC? Round your answer to 2 decimal
places. Do not round intermediate calculations.
%...

Currently, Meyers Manufacturing Enterprises (MME) has a capital
structure consisting of 35% debt and 65% equity. MME's debt
currently has a 7.3% yield to maturity. The risk-free rate (rRF) is
5.3%, and the market risk premium (rM – rRF) is 6.3%. Using the
CAPM, MME estimates that its cost of equity is currently 11.5%. The
company has a 40% tax rate.
a. What is MME's current WACC? Round your answer to 2 decimal
places. Do not round intermediate calculations.
%...

Currently, Forever Flowers Inc. has a capital structure
consisting of 20% debt and 80% equity. Forever's debt currently has
an 8% yield to maturity. The risk-free rate (rRF) is 6%, and the
market risk premium (rM - rRF) is 8%. Using the CAPM, Forever
estimates that its cost of equity is currently 11.5%. The company
has a 25% tax rate.
What is Forever's current WACC? Round your answer to two decimal
places. %
What is the current beta on Forever's...

Problem 15-3 Capital Structure and Growth
Edwards Construction
currently has debt outstanding with a market value of $440,000 and
a cost of 7 percent. The company has an EBIT of $30,800 that is
expected to continue in perpetuity. Assume there are no
taxes.
a. What is the value of the company’s equity and
the debt-to-value ratio? (Do not round intermediate
calculations. Leave no cells blank - be certain to enter "0"
wherever required. Round your debt-to-value answer to 3 decimal...

Pagemaster Enterprises is considering a change from its current
capital structure. The company currently has an all-equity capital
structure and is considering a capital structure with 35 percent
debt. There are currently 10,560 shares outstanding at a price per
share of $50. EBIT is expected to remain constant at $60,696. The
interest rate on new debt is 5 percent and there are no taxes.
a.
Rebecca owns $22,000 worth of stock in the company. If the firm
has a 100...

Beckman Engineering and Associates (BEA) is considering a change
in its capital structure. BEA currently has $20 million in debt
carrying a rate of 6%, and its stock price is $40 per share with 2
million shares outstanding. BEA is a zero growth firm and pays out
all of its earnings as dividends. The firm's EBIT is $15.654
million, and it faces a 40% federal-plus-state tax rate. The market
risk premium is 6%, and the risk-free rate is 4%. BEA...

WACC AND PERCENTAGE OF DEBT FINANCING
Hook Industries's capital structure consists solely of debt and
common equity. It can issue debt at rd = 8%, and its
common stock currently pays a $4.00 dividend per share
(D0 = $4.00). The stock's price is currently $23.75, its
dividend is expected to grow at a constant rate of 7% per year, its
tax rate is 40%, and its WACC is 14.80%. What percentage of the
company's capital structure consists of debt? Do...

Beckman Engineering and Associates (BEA) is considering a change
in its capital structure. BEA currently has $20 million in debt
carrying a rate of 8%, and its stock price is $40 per share with 2
million shares outstanding. BEA is a zero growth firm and pays out
all of its earnings as dividends. The firm's EBIT is $13.516
million, and it faces a 30% federal-plus-state tax rate. The market
risk premium is 4%, and the risk-free rate is 5%. BEA...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 9 minutes ago

asked 19 minutes ago

asked 28 minutes ago

asked 32 minutes ago

asked 41 minutes ago

asked 41 minutes ago

asked 46 minutes ago

asked 52 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago