10. You've identified a "pure play" firm in the knife industry that you think has a similar business model to the one your firm would hope to follow. The firm has a cost of debt equal to 7%, and you've estimated its cost of equity as 17%. If the firm maintains a debt-to-value ratio of 20% (with 80% equity financing) what is the cost of capital of the firm's assets (also called the "opportunity cost of capital")? Calculate here VA = .07 07.17 .053 + VE (1 + — ) v₁ - 12/10 = = 1+ 2/4/1). 1,257 (1 YA + (A-₂) 425 - 11/1/12 - 1625 + +17 (1625-12) .8 2 t -674.17 .567 YA .625 1.4353 .8 794 VAN VE- 1.4355 8 8 p= 11/ You believe this comparable firm isn't taking full advantage of its debt tax shield. Although you believe that this firm's opportunity cost of capital captures the risk of your project, you will finance your project with more debt than the comparable firm employs, and you'll aim to maintain a 40 % debt to value ratio for this project. If your firm can maintain a 7% cost of debt, what would be its cost of equity for this project, given its target of a 40 % debt to value ratio? If your firm pays corporate taxes at a rate of 20 %, what would be the weighted average cost of capital (WACC) for this project? L
10. You've identified a "pure play" firm in the knife industry that you think has a similar business model to the one your firm would hope to follow. The firm has a cost of debt equal to 7%, and you've estimated its cost of equity as 17%. If the firm maintains a debt-to-value ratio of 20% (with 80% equity financing) what is the cost of capital of the firm's assets (also called the "opportunity cost of capital")? Calculate here VA = .07 07.17 .053 + VE (1 + — ) v₁ - 12/10 = = 1+ 2/4/1). 1,257 (1 YA + (A-₂) 425 - 11/1/12 - 1625 + +17 (1625-12) .8 2 t -674.17 .567 YA .625 1.4353 .8 794 VAN VE- 1.4355 8 8 p= 11/ You believe this comparable firm isn't taking full advantage of its debt tax shield. Although you believe that this firm's opportunity cost of capital captures the risk of your project, you will finance your project with more debt than the comparable firm employs, and you'll aim to maintain a 40 % debt to value ratio for this project. If your firm can maintain a 7% cost of debt, what would be its cost of equity for this project, given its target of a 40 % debt to value ratio? If your firm pays corporate taxes at a rate of 20 %, what would be the weighted average cost of capital (WACC) for this project? L
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Concept explainers
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
Question
Finance
please answer number 11, i believe you need the answer to number 10 to solve 11
Transcribed Image Text:10. You've identified a "pure play" firm in the knife industry that you think has a similar business
model to the one your firm would hope to follow. The firm has a cost of debt equal to 7%, and
you've estimated its cost of equity as 17%. If the firm maintains a debt-to-value ratio of 20%
(with 80% equity financing) what is the cost of capital of the firm's assets (also called the
"opportunity cost of capital")?
Calculate A here.
VA =
-07
07.17
.058 + 567
VA + 2/(VA-√₂)
YA - 625
12.625 + - 07/17 (625-12)
VE =
(1 + 2/2) VA
-) - 2/1/2
- 12/10
(1 + 2/1/12).425 - 7%
<-
17%
17%
257
.8
2 t
.17
-074.17
(8)
1.4353
.8
= 1.794
WARE VE- 1.4355
8.
vp =
11/ You believe this comparable firm isn't taking full advantage of its debt tax shield. Although you
believe that this firm's opportunity cost of capital captures the risk of your project, you will
finance your project with more debt than the comparable firm employs, and you'll aim to
maintain a 40% debt to value ratio for this project. If your firm can maintain a 7% cost of debt,
what would be its cost of equity for this project, given its target of a 40% debt to value ratio? If
your firm pays corporate taxes at a rate of 20%, what would be the weighted average cost of
capital (WACC) for this project?
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