Question

Company XYZ has a target capital structure of 20 percent debt and 80 percent equity. Its...

Company XYZ has a target capital structure of 20 percent debt and 80 percent equity. Its bonds

pay an average 6 percent coupon (semi-annual payout), mature in 7 years, and sell for $1049.54

per $1,000 in face value. The company stock beta is 1.02 versus the market. The risk-free rate

of interest is 4 percent and the market risk premium is 6 percent. The company is a mature,

constant growth firm that just paid a dividend (D0) of $2.57 and has a stock price (P0) of $54.00

per share. The growth rate in earnings and dividends is 5 percent while the marginal tax rate is

40 percent.

a. The after-tax cost of debt is:

b. The cost of equity using the CAPM approach is:

c. The cost of equity using the discounted cash flow approach is:

d. The weighted average cost of capital, given the target capital structure is:

Homework Answers

Answer #1

A) To find the kd, we need to put the following values in the financial calculator :

Input 7x2=14 -1,049.54 (6%/2)x1,000 =30 1,000
Tvm n i/y pv pmt fv
Output 2.57

Hence, kd = 2r = 2 x 2.57% = 5.15%

After-tax kd = kd x (1-t) = 5.15% x (1-0.40) = 3.09%

B). According to the CAPM,

Ke = rf + beta(mrp)

= 4% + 1.02(6%) = 4% + 6.12% = 10.12%

C). According to the Dcf,

Ke = (d1/po) + g

= {(2.57 x 1.05) / 54} + 0.05 = 0.05 + 0.05 = 0.10, or 10%

D). Average ke = (10.12% + 10%) / 2 = 10.06%

Wacc = (wd x after-tax kd) + (we x ke)

= (0.20 x 3.09%) + (0.80 x 10.06%) = 0.62% + 8.05% = 8.66%

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Allison Engines Corporation has established a target capital structure of 40 percent debt and 60 percent...
Allison Engines Corporation has established a target capital structure of 40 percent debt and 60 percent common equity.  The current market price of the firm’s stock is P0 = $59.2; its last dividend was D0 = $4.7, and its expected dividend growth rate is 5.3 percent.  What will Allison’s marginal cost of retained earnings, rs, be?
Rollins Corporation is estimating its WACC. Its target capital structure is 20 percent debt, 20 percent...
Rollins Corporation is estimating its WACC. Its target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Rollins' beta is 1.6 , the risk-free rate is 4 percent, and the market risk premium is 5 percent. Rollins is a constant-growth firm which just paid a dividend of $2.00, sells for $30 per share, and has a growth rate of 5 percent. The firm's policy is to use a risk premium of 5 percentage points...
Rollins Corporation is estimating its WACC. Its target capital structure is 20 percent debt, 20 percent...
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, paid semiannually, a current maturity of 20 years, and sell for $1,000. The firm could sell, at par, $100 preferred stock which pays a 12 percent annual dividend, but flotation costs of 5 percent would be incurred. Rollins' beta is 1.2, the risk-free rate is 10 percent, and the market...
Rollins Corporation is estimating its WACC. Its target capital structure is 20 percent debt, 20 percent...
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...
Palencia Paints Corporation has a target capital structure of 45% debt and 55% common equity, with...
Palencia Paints Corporation has a target capital structure of 45% debt and 55% common equity, with no preferred stock. Its before-tax cost of debt is 9%, and its marginal tax rate is 25%. The current stock price is P0 = $21.50. The last dividend was D0 = $2.50, and it is expected to grow at a 4% constant rate. What is the rs? What is its cost of common equity and its WACC?
Patton Paints Corporation has a target capital structure of 35% debt and 65% common equity, with...
Patton Paints Corporation has a target capital structure of 35% debt and 65% common equity, with no preferred stock. Its before-tax cost of debt is 10% and its marginal tax rate is 40%. The current stock price is P0 = $30.00. The last dividend was D0 = $2.50, and it is expected to grow at a 8% constant rate. What is its cost of common equity and its WACC? Round your answers to two decimal places. rs = % WACC...
Palencia Paints Corporation has a target capital structure of 40% debt and 60% common equity, with...
Palencia Paints Corporation has a target capital structure of 40% debt and 60% common equity, with no preferred stock. Its before-tax cost of debt is 13%, and its marginal tax rate is 25%. The current stock price is P0 = $27.00. The last dividend was D0 = $2.25, and it is expected to grow at a 5% constant rate. What is its cost of common equity and its WACC? Do not round intermediate calculations. Round your answers to two decimal...
Palencia Paints Corporation has a target capital structure of 25% debt and 75% common equity, with...
Palencia Paints Corporation has a target capital structure of 25% debt and 75% common equity, with no preferred stock. Its before-tax cost of debt is 10%, and its marginal tax rate is 40%. The current stock price is P0 = $35.00. The last dividend was D0 = $3.00, and it is expected to grow at a 5% constant rate. What is its cost of common equity and its WACC? Do not round intermediate calculations. Round your answers to two decimal...
Palencia Paints Corporation has a target capital structure of 30% debt and 70% common equity, with...
Palencia Paints Corporation has a target capital structure of 30% debt and 70% common equity, with no preferred stock. Its before-tax cost of debt is 12%, and its marginal tax rate is 40%. The current stock price is P0 = $29.50. The last dividend was D0 = $3.00, and it is expected to grow at a 8% constant rate. What is its cost of common equity and its WACC? Round your answers to two decimal places. Do not round your...
Palencia Paints Corporation has a target capital structure of 30% debt and 70% common equity, with...
Palencia Paints Corporation has a target capital structure of 30% debt and 70% common equity, with no preferred stock. Its before-tax cost of debt is 9%, and its marginal tax rate is 25%. The current stock price is P0 = $21.50. The last dividend was D0 = $2.25, and it is expected to grow at a 5% constant rate. What is its cost of common equity and its WACC? Do not round intermediate calculations. Round your answers to two decimal...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT