Question

Fama's Llamas has a weighted average cost of capital of 12.5 percent. The company's cost of equity is 17 percent, and its pretax cost of debt is 7 percent. The tax rate is 34 percent. What is the company's target debt-equity ratio?

Stock in Country Road Industries has a beta of 0.91. The market risk premium is 7.5 percent, and T-bills are currently yielding 5 percent. The company's most recent dividend was $1.7 per share, and dividends are expected to grow at a 5 percent annual rate indefinitely. If the stock sells for $37 per share, what is your best estimate of the company's cost of equity

Answer #1

1) Debt-Equity Ratio is **0.57**

Step-1:Calculation of weight of debt and Equity | ||||

Weighted Average cost of capital | = | (Wd*Kd)+(We*Ke) | ||

0.1250 | = | (x*0.0462)+((1-x)*0.17) | ||

0.1250 | = | (0.0462x)+(0.17-0.17x) | ||

0.1250 | = | -0.1238x+0.17 | ||

-0.0450 | = | -0.1238x | ||

0.1238x | = | 0.0450 | ||

x | = | 0.3635 | ||

1-x | = | 0.6365 | ||

Working: | ||||

Assumed weight of Debt is "x" and Equity is "1-x". | ||||

After tax cost of debt | = | Before tax cost of debt * (1-Tax Rate) | ||

= | 7%*(1-0.34) | |||

= | 0.0462 | |||

Step-2:Calculation of debt-Equity Ratio | ||||

Debt-Equity Ratio | = | Weight of debt | / | Weight of Equity |

= | 0.3635 | / | 0.6365 | |

= | 0.57 |

Fama's Llamas has a weighted average cost of capital of 9
percent. The company's cost of equity is 16 percent, and its pretax
cost of debt is 10 percent. The tax rate is 36 percent. What is the
company's target debt-equity ratio?

Fama's Llamas has a weighted average cost of capital of 9
percent. The company's cost of equity is 15 percent, and its pretax
cost of debt is 10 percent. The tax rate is 36 percent. What is the
company's target debt-equity ratio?
(Do not round intermediate calculations and round your
final answer to 2 decimal places. For example, 1.2345 should be
entered as 1.23.)

Fama's Llamas has a weighted average cost of capital of 7.9
percent. The company's cost of equity is 11 percent, and its cost
of debt is 5.8 percent. The tax rate is 25 percent. What is Fama's
debt-quity ratio?

Fama’s Llamas has a weighted average cost of capital of 9.1
percent. The company’s cost of equity is 14 percent, and its pretax
cost of debt is 6.4 percent. The tax rate is 24 percent. What is
the company’s target debt-equity ratio? (Do not round intermediate
calculations and round your answer to 4 decimal places, e.g.,
32.1616.)

Target Capital structure
Fama's Lama has a weighted average cost of capita of 10%. The
company's cost of equity is 12%, pre tax cost of debt is 8%. If the
tax rate is 0% then what is the target debt to equtiy ratio?

Fama’s Llamas has a weighted average cost of capital of 9.3
percent. The company’s cost of equity is 12.9 percent, and its cost
of debt is 7.5 percent. The tax rate is 23 percent. What is the
company’s debt-equity ratio? (Do not round intermediate
calculations and round your answer to 4 decimal places, e.g.,
32.1616.)

Fama’s Llamas has a weighted average cost of capital of 9.9
percent. The company’s cost of equity is 13.5 percent, and its cost
of debt is 8.1 percent. The tax rate is 24 percent. What is the
company’s debt-equity ratio?

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percent. The company’s cost of equity is 13 percent, and its cost
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company’s debt-equity ratio?

Fama’s Llamas has a weighted average cost of capital of 9.1
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Stock in Daenerys Industries has a beta of 1.27. The market risk
premium is 8 percent, and T-bills are currently yielding 3 percent.
The company's most recent dividend was $1.7 per share, and
dividends are expected to grow at a 6.5 percent annual rate
indefinitely. If the stock sells for $32 per share, what is your
best estimate of the company's cost of equity?

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