Question

A company currently has a debt to total assets ratio of 35% and the beta of the company is 1.05. The company has a current cost of debt of 7.8% and a tax rate of 38%. The current risk-free rate is 4.5% and the market risk premium (the difference between the return on the market and the risk-free rate of return) is 4%. Companies with similar risk characteristics and 40% debt can borrow at 9.5%. Would the company lower its WACC if it increased its debt to 40%?

Answer #1

Isabella Publishing's tax rate is 21%, its beta is 1.40, and it
currently has no debt. The CFO is considering moving to a capital
structure with 25% debt and 75% equity and using the newly raised
capital to repurchase shares of the common stock. If the risk-free
rate is 4.5% and the market risk premium is 7.0%, by how much would
the cost of equity for the levered firm increase, compared to the
cost of equity of the unlevered firm?...

Cosmetics currently has 40% debt and 60% equity (with no
preferred
stock). Their current beta is 1.70. The company is considering
splitting its debt in half (to
20%) or paying it all off. Their current debt rate is 6.00% and, if
they reduce to 20% their
bank will give them a 5.00% rate. Calculate the WACC for each of
the three debt levels.
Which debt level should the company pursue? The risk-free rate is
3.60% and the market
risk premium...

Samsung currently has 5 million shares outstanding, trading at
$24.97 and no debt. The stock's beta is 1.2. T-Bills currently
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
What is the company's current WACC? Based on what happens to the...

Samsung currently has 5 million shares outstanding, trading at
$24.97 and no debt. The stock's beta is 1.2. T-Bills currently
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%.
What is the company's current WACC? Based on what happens to the
value of...

Doubleday Brewery is considering a new project.
The company currently has a target debt–equity ratio of .40, but
the industry target debt–equity ratio is .25. The industry average
beta is 1.08. The market risk premium is 8 percent, and the
(systematic) risk-free rate is 2.4 percent.
Assume all companies in this industry can issue debt at the
risk-free rate. The corporate tax rate is 21 percent. The project
will be financed at Doubleday’s target debt–equity ratio. The
project requires an...

Currently, Meyers Manufacturing Enterprises (MME) has a capital
structure consisting of 35% debt and 65% equity. MME's debt
currently has a 7.3% yield to maturity. The risk-free rate (rRF) is
5.3%, and the market risk premium (rM – rRF) is 6.3%. Using the
CAPM, MME estimates that its cost of equity is currently 11.5%. The
company has a 40% tax rate.
a. What is MME's current WACC? Round your answer to 2 decimal
places. Do not round intermediate calculations.
%...

Ethier Enterprise has an unlevered beta of 1. Ethier is financed
with 35% debt and has a levered beta of 1.3. If the risk free rate
is 4.5% and the market risk premium is 5%, how much is the
additional premium that Ethier's shareholders require to be
compensated for financial risk? Round your answer to two decimal
places.

Q Ltd, an airplane parts manufacturer, currently has $25 million
in outstanding debt and has 10 million shares outstanding. The
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
tax is 40%. The risk premium for the equity is 5.5%. (a) What is
the company’s current weighted average cost of...

Pincrof Corporation has a current WACC of 6% at its target
debt/assets ratio of 40% which is continuously adjusted. Pincrof
plans to increase its target debt/assets ratio to 70% which would
increase the cost of debt by 200 basis points (=+2%) p.a. to 4%
p.a. We know that the corporate tax rate is 20%, the estimated
market risk premium 5% and the risk-free rate 1% p.a. Pincrof's
unlevered equity beta is
a. 1,032 b. 0,688 c. 0,752 d. 0,924

TVA currently has a debt-equity ratio of 0.2 and an average tax
rate of 34%. Using the CAPM, the firm estimates that its current
equity ß is 1 and its current debt ß is 0.2857. The risk-free rate
is 2% and the expected equity market risk premium (MRP) is 7%.
The firm is considering a new capital structure with a
debt-equity ratio of 0.9. Any proceeds from issuing new debt will
be used to repurchase shares. An investment bank has...

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