Question

Suppose you are estimating the cost of capital for a firm within the corporate value model....

Suppose you are estimating the cost of capital for a firm within the corporate value model. Explain briefly how you determine the input values for the WACC; in particular, 1) the weights and 2) cost of debt.

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Weights of the company can be calculated by taking the market value of equity,debt and preferred stock .
Market value of Equity=Share Price*Number of outstanding shares
Market value of Preferred Stock=Share Price*Number of Preferred Stock
Market Value of Bond =Bond Price*Number of Bonds

It can also use target capital ratios for estimating WACC.

Cost of Debt can be calculated by calculating the annual YTM of the bond issues. If number of bonds are issued then weighted average cost of debt needs to be calculated.

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
Suppose you are estimating the cost of capital for a firm within the corporate value model....
Suppose you are estimating the cost of capital for a firm within the corporate value model. Explain briefly how you determine the input values for the WACC; in particular, 1) the weights and 2) cost of debt.
Suppose you are estimating a growth rate of FCF within the corporate value model. You noticed...
Suppose you are estimating a growth rate of FCF within the corporate value model. You noticed that the firms FCF has been declining in the past three years while its NOPAT and operating capital have been steadily increasing over the same time period. 1) What could be the reason for the decline in FCFs, and 2) what can you say, in general, about the future FCF growth rate?
Suppose the WACC (weighted average cost of capital) of a firm is 12.5 percent, while its...
Suppose the WACC (weighted average cost of capital) of a firm is 12.5 percent, while its before-tax cost of debt is 3 percent. The firm’s debt-to-equity ratio is 1, and the cost of equity of the corresponding unlevered firm is 15 percent. By assuming that the Modigliani-Miller Theorem with corporate taxes holds, answer the following questions. i) What is the effective corporate tax rate for the firm? ii) What is the cost of equity of the firm?
MM Model with Corporate Taxes An unlevered firm has a value of $700 million. An otherwise...
MM Model with Corporate Taxes An unlevered firm has a value of $700 million. An otherwise identical but levered firm has $140 million in debt at a 4% interest rate. Its cost of debt is 4% and its unlevered cost of equity is 11%. No growth is expected. Assuming the corporate tax rate is 35%, use the MM model with corporate taxes to determine the value of the levered firm. Enter your answer in millions. For example, an answer of...
Which of the following statements is NOT correct? a. When estimating the cost of debt, don’t...
Which of the following statements is NOT correct? a. When estimating the cost of debt, don’t use the coupon rate on existing debt. b.Use the current interest rate on new debt. When estimating the risk premium for the CAPM approach, don’t subtract the current long-term T-bond rate from the historical average return on common stocks. c. Use the target capital structure to determine the weights. If you don’t know the target weights, then use the current book value of equity...
Suppose you are trying to estimate the after tax cost of debt for a firm as...
Suppose you are trying to estimate the after tax cost of debt for a firm as part of the calculation of the Weighted Average Cost of Capital (WACC). The corporate tax rate for this firm is 37%. The firm's bonds pay interest semiannually with a 5.7% coupon rate and have a maturity of 6 years. If the current price of the bonds is $932.56, what is the after tax cost of debt for this firm? (Answer to the nearest tenth...
M&M described the relationship between capital structure and firm value, in a world with corporate taxes,...
M&M described the relationship between capital structure and firm value, in a world with corporate taxes, as follows: VL = VU + τD (where τ is the corporate tax rate and D is the firm’s amount of debt). Note that they also said VL = VU when there were NO corporate taxes. Explain what you think this formula says about the relationship between firm debt usage and firm value. Then explain one aspect of the real world that discourages firms...
The corporate valuation model, the price-to-earnings (P/E) multiple approach, and the economic value-added (EVA) approach are...
The corporate valuation model, the price-to-earnings (P/E) multiple approach, and the economic value-added (EVA) approach are some examples of valuation techniques. The corporate valuation model is similar to the dividend-based valuation that you’ve done in previous problems, but it focuses on a firm’s free cash flows (FCFs) instead of its dividends. Some firms don’t pay dividends, or their dividends are difficult to forecast. For that reason, some analysts prefer to use the corporate valuation model, which maintains that the value...
Which is the more difficult input to estimate when calculating the Weighted Average Cost of Capital...
Which is the more difficult input to estimate when calculating the Weighted Average Cost of Capital (WACC), debt or equity? Briefly explain why?
The corporate valuation model, the price-to-earnings (P/E) multiple approach, and the economic value added (EVA) approach...
The corporate valuation model, the price-to-earnings (P/E) multiple approach, and the economic value added (EVA) approach are some examples of valuation techniques. The corporate valuation model is similar to the dividend-based valuation that you’ve done in previous problems, but it focuses on a firm’s free cash flows (FCFs) instead of its dividends. Some firms don’t pay dividends, or their dividends are difficult to forecast. For that reason, some analysts use the corporate valuation model. Tropetech Inc. has an expected net...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT