Question

4. Tri Co. has the following cost of debt structure: wd 0% 20% 30% 40% 50%...

4. Tri Co. has the following cost of debt structure:

wd

0%

20%

30%

40%

50%

rd

0.0%

10.0%

12.0%

14.0%

15.0%

The market risk premium is 7%, the risk free rate is 4%, beta of unleveraged firm is 1.10, Hamada’s equation b= bU [1 + (1 - T)(wd/we)]. Tax rate T = 35%.

Please use the above information to answer following questions:

a. If the firm uses 40% debt, what is the cost of equity of the firm, based on CAPM model?

b. What is WACC of the firm?

c. If FCF0 = 300 million, g=4%, what is the firm value?

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Tri Co. has the following cost of debt structure: The market risk premium is 4.5%, the...
Tri Co. has the following cost of debt structure: The market risk premium is 4.5%, the risk free rate is 5%, beta of unleveraged firm is 1.20, Hamada’s equation b= bU [1 + (1 - T)(wd/we)]. T=40%. Please use the above information to answer following questions: wd 0% 20% 30% 40% 50% rd 0.0% 9.0% 10.0% 11.0% 12.0% If the firm uses 50% debt, what is the cost of equity of the firm, based on CAPM model? Cost of Equity...
Assume the company has weight of debt WD = 80%, cost of debt RD = 15%,...
Assume the company has weight of debt WD = 80%, cost of debt RD = 15%, for un-leveraged firm: Bu =1; the company has Tax Rate = 40%, risk-free rate Rf = 4%, Market Return = 10%, free cash flow FCF0 = 200 million, growth rate g = 4%. Use the following formula for beta of leveraged company: B = Bu [1+ (1-T) × (WD /WS)], What is the WACC and what is the value of the firm? Please show...
Assumption: WD = 60%, RD = 14%, for unleveraged firm: Bu =1; Tax Rate=35%, Rf= 5%,...
Assumption: WD = 60%, RD = 14%, for unleveraged firm: Bu =1; Tax Rate=35%, Rf= 5%, Market Return Premium = 6%, FCF0 = 250 million, g=3%. Use the formula B = Bu [1+ (1-T) × (Wd /Ws)], What is the WACC and what is the value of the firm? ********PLUS SHOW ALL WORK THANK YOU!!!********
WACC and Optimal Capital Structure F. Pierce Products Inc. is considering changing its capital structure. F....
WACC and Optimal Capital Structure F. Pierce Products Inc. is considering changing its capital structure. F. Pierce currently has no debt and no preferred stock, but it would like to add some debt to take advantage of low interest rates and the tax shield. Its investment banker has indicated that the pre-tax cost of debt under various possible capital structures would be as follows: Market Debt- to-Value Ratio (wd) Market Equity-to-Value Ratio (ws) Market Debt- to-Equity Ratio (D/S) Before-Tax Cost...
Rollins Corporation has a target capital structure consisting of 20% debt, 20% preferred stock, and 60%...
Rollins Corporation has a target capital structure consisting of 20% debt, 20% preferred stock, and 60% common equity. Assume the firm has insufficient retained earnings to fund the equity portion of its capital budget. It has 20-year, 12% semiannual coupon bonds that sell at their par value of $1,000. The firm could sell, at par, $100 preferred stock that pays a 12% annual dividend, but flotation costs of 5% would be incurred. Rollins’ beta is 1.2, the risk-free rate is...
Bradshaw Steel has a capital structure with 30% debt (all long-term bonds) and 70% common equity....
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...
F. Pierce Products Inc. is considering changing its capital structure. F. Pierce currently has no debt...
F. Pierce Products Inc. is considering changing its capital structure. F. Pierce currently has no debt and no preferred stock, but it would like to add some debt to take advantage of low interest rates and the tax shield. Its investment banker has indicated that the pre-tax cost of debt under various possible capital structures would be as follows: Market Debt- to-Value Ratio (wd) Market Equity-to-Value Ratio (ws) Market Debt- to-Equity Ratio (D/S) Before-Tax Cost of Debt (rd) 0.0 1.0...
Vandelay Industries is considering four average risk projects with information below related to their rates of...
Vandelay Industries is considering four average risk projects with information below related to their rates of return. Determine Vandelay Industries' WACC. INPUTS USED IN THE MODEL Tax rate 30% B-T rd 8% Net Pps $35.00 Dps $5.00 P0 $50.00 D1 $2.50 g 5% Vandelay's beta 1.1 Market risk premium, RPM 7.50% Risk free rate, rRF 3.0% Target capital structure from common stock 60% Target capital structure from preferred stock 15% Target capital structure from debt 25% Calculate the cost of...
Federal Inc. currently finances with 25% debt (i.e., wd = 25%), but its new CFO is...
Federal Inc. currently finances with 25% debt (i.e., wd = 25%), but its new CFO is considering changing the capital structure so wd = 50% by issuing additional bonds and using the proceeds to repurchase and retire common shares so the percentage of common equity in the capital structure (wc) = 1 – wd. Given the data shown below, by how much would this recapitalization change the firm's cost of equity? (Hint: You must unlever the current beta and then...
Circle Inc. currently uses no debt, but its new CFO is considering changing the capital structure...
Circle Inc. currently uses no debt, but its new CFO is considering changing the capital structure to 77.5% debt (wd) by issuing bonds and using the proceeds to repurchase and retire some common shares so the percentage of common equity in the capital structure (wc = 1 – wd). Given the data shown below, the cost of equity under the new capital structure minus the cost of equity under the old capital structure is _____%. If your answer is 1.23%...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT