Question

Werner Company has debt with both a face and a market value of $7,200,000. This debt has a coupon rate of 5.8 percent and pays interest annually. The expected earnings before interest and taxes are $2,512,000, the tax rate is 25 percent, and the unlevered cost of capital is 10.4 percent. What is the firm's cost of equity? 13.04% 12.67% 11.93% 12.35% 11.76%

Answer #1

The debt has both face and market value of $7,200,000. The I/Y(cost of debt ) will be 5.8%,

The unlevered cost if equity is 10.4%,

The value of firm is = EBIT(1 - TAX RATE)/ COST OF EQUITY

= $2,512,000* 0.75/ .104

=$18,115,384.6

Value of firm = $18,115,384.6

Debt = $7,200,000

EQUITY = $10,915,384.6

D/E = $7,200,000/ $10,915,384.6

D/E = 0.659

Re = Ro + D/E ( Ro - Rd)(1 - tax rate), where Ro = unlevered cost of equity , Rd = cost of debt

=10.4+ 0.659 ( 10.4 - 5.8) (1 - 0.25)

= 12.67%

So, the correct option is option 2.

Pine Corporation has debt with both a face and a market value of
$1,540,000. This debt has a coupon rate of 6 percent and pays
interest annually. The expected earnings before interest and taxes
are $830,000, the tax rate is 25 percent, and the unlevered cost of
capital is 10.4 percent. What is the firm's cost of equity?
11.45%
11.73%
11.92%
12.03%
12.21%

Johnson Tire Distributors has debt with both a face and a market
value of $12,000. This debt has a coupon rate of 6 percent and pays
interest annually. The expected earnings before interest and taxes
are $2,100, the tax rate is 30 percent, and the unlevered cost of
capital is 11.7 percent. What is the firm's cost of equity?
22.46 percent
23.20 percent
22.87 percent
25.14 percent
23.59 percent

The Pizza Shoppe has debt with both a face and market value of
$24,000 and a coupon rate of 6.4 percent. The expected earnings
before interest and taxes are $21,400, the tax rate is 35 percent,
and the unlevered cost of capital is 11.4 percent. What is the
firm's cost of equity?

Al's Pub has debt with both a book and a market value of
$120,000. This debt has a coupon rate of 9% and pays interest
annually. The expected earnings before interest and taxes are
$42,600, the tax rate is 34%, and the unlevered cost of capital is
11%. What is the firm's cost of equity?
a. 11.90%
b. 12.15%
c. 12.11%
d. 12.18%
e. 12.07%

Al's Pub has debt with both a book and a market value of
$120,000. This debt has a coupon rate of 9% and pays interest
annually. The expected earnings before interest and taxes are
$42,600, the tax rate is 34%, and the unlevered cost of capital is
11%. What is the firm's cost of equity?
A 12.18%
B 12.15%
C 12.07%
D 11.90%
E 12.11%

Jemisen's firm has expected earnings before interest and taxes
of $1,400. Its unlevered cost of capital is 13 percent and its tax
rate is 34 percent. The firm has debt with both a book and a face
value of $1,800. This debt has a 7 percent coupon and pays interest
annually. What is the firm's weighted average cost of capital?
A) 12.03 percent
B) 12.88 percent
C) 12.50 percent
D) 11.97 percent
E) 12.20 percent

a. A bond that has a $1,000 par value (face value) and a
contract or coupon interest rate of 10.1 percent. Interest payments
are $50.50 and are paid semiannually. The bonds have a current
market value of $1,128 and will mature in 10 years. The firm's
marginal tax rate is 34 percent.
b. A new common stock issue that paid a $1.85 dividend last
year. The firm's dividends are expected to continue to grow at 6.4
percent per year, forever....

A company has an unlevered cost of capital of 12 percent, a tax
rate of 34 percent, and expected earnings before interest and taxes
of $1,300. The company has $2,200 in bonds outstanding that have an
8 percent coupon and pay interest annually. The bonds are selling
at par value.
What is the cost of equity?
How do you calculate this?

Rappaport Industries has 5,650 perpetual bonds outstanding with
a face value of $2,000 each. The bonds have a coupon rate of 6.4
percent and a yield to maturity of 6.7 percent. The tax rate is 35
percent. What is the present value of the interest tax shield?
Debbie's Cookies has a return on assets of 8.1 percent and a
cost of equity of 12.5 percent. What is the pretax cost of debt if
the debt–equity ratio is .87? Ignore taxes....

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taxes of $148,600. Debt is $220,000. The unlevered cost of equity
is 13.6 percent while the pretax cost of debt is 7.4 percent. The
tax rate is 21 percent. What is the weighted average cost of
capital? (Hint: Find RE first)

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