Question

Peace Waterfront Ltd currently has 1.2 million ordinary shares outstanding and the share has a beta of 2.2. It also has $10 million face value of bonds that have 5 years remaining to maturity and 8% coupon rate with semi-annual payments, and are priced to yield 13.65%. If Peace Waterfront issues up to $2.5 million of new bonds, the bonds will be priced at par and have a yield of 13.65%; if it issues bonds beyond $2.5 million, the expected yield on the entire issuance will be 16%. Peace Waterfront has learned that it can issue new ordinary shares at $10 a share. The current risk-free rate of interest is 3% and the expected market return is 10%. Peace Waterfront’s marginal tax rate is 30%. Compute the market value for both bond and equity.

If Peace Waterfront intends to raise $7.5 million of new capital while maintaining the same debt-to-equity ratio as above, compute its weighted average cost of capital (WACC).

Can Peace Waterfront use the WACC computed for all of its future investment projects? Why?

Answer #1

Peace Waterfront Ltd currently has 1.2 million ordinary shares
outstanding and the share has a beta of 2.2. It also has $10
million face value of bonds that have 5 years remaining to maturity
and 8% coupon rate with semi-annual payments, and are priced to
yield 13.65%. If Peace Waterfront issues up to $2.5 million of new
bonds, the bonds will be priced at par and have a yield of 13.65%;
if it issues bonds beyond $2.5 million, the expected...

Wonderful Ltd currently has 1.2 million ordinary shares
outstanding and the share has a beta of 2.2. It also has $10
million face value of bonds that have 5 years remaining to maturity
and 8% coupon rate with semi-annual payments, and are priced to
yield 13.65%. If Wonderful issues up to $2.5 million of new bonds,
the bonds will be priced at par and have a yield of 13.65%; if it
issues bonds beyond $2.5 million, the expected yield on...

Pearson Ltd is financed through the following sources:
Ordinary share: 100 million shares outstanding, with current
market price of
one share at $2.2
Bank loan: $100 million borrowed from ANZ bank with an
interest rate of 6%
Corporate bond: Pearson’s corporate bond is currently trading
at 80% of its
face value. The bonds pay coupons once per annum and have a
total book value of $100 million. The current yield to maturity on
the bond is 8%...

Samsung currently has 5 million shares outstanding, trading at
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yield 0.5% and the expected return on the S&P 500 is 5%.
The company is thinking of issuing 81 million of debt to
repurchase its own stock. The yield to maturity on similar bonds
issued by other companies is 5%. The average tax rate is 34%. Use
CAPM
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Samsung currently has 5 million shares outstanding, trading at
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The company is thinking of issuing 81 million of debt to
repurchase its own stock. The yield to maturity on similar bonds
issued by other companies is 5%. The average tax rate is 34%.
What is the company's current WACC? Based on what happens to the
value of...

Marshal Ltd currently has $250 million of market value debt
outstanding. The 9 percent coupon bonds (semiannual pay) have a
maturity of 15 years and are currently priced at $877.07 per bond.
The company also has an issue of 2 million perpetual preference
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Q Ltd, an airplane parts manufacturer, currently has $25 million
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market value per share is $25. The company is currently rated A,
its bonds have a yield to maturity of 10%, and the current beta of
the stock is 1.06. The risk-free rate is 8% now, and the company’s
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the company’s current weighted average cost of...

Pearson Ltd is financed through the following sources:
Ordinary share: 100 million shares outstanding, with current
market price of
one share at $2.2
Bank loan: $100 million borrowed from ANZ bank with an
interest rate of 6%
Corporate bond: Pearson’s corporate bond is currently trading
at 80% of its
face value. The bonds pay coupons once per annum and have a
total book value of $100 million. The current yield to maturity on
the bond is 8%...

Allen’s Authentic Automotive has 90,000 ordinary shares
outstanding (with a beta of 1.13) which are currently selling at
$72.00 per share. The rate of return required by ordinary
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outstanding with a current market price of $54 a share. The
preference shares have a book value of $100 each and have a rate of
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Rumolt Motors has
7575
million shares outstanding with a share price of
$ 60$60
per share. In addition, Rumolt has issued bonds with a total
current market value of
$ 4 comma 221$4,221
million. Suppose Rumolt's equity cost of capital is
10 %10%,
and its debt cost of capital is
7 %7%.
a. What is Rumolt's pre-tax WACC?
b. If Rumolt's corporate tax rate is
30 %30%,
what is its after-tax WACC?

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