5 "In dividend valuation model of stock price we do not pay attention to capital gain of selling stock." Is this statement true or false? Explain. 6 a) French Company decided to take a $1.5 mln bank loan, as the bank is offering a good interest rate of 9% p.a. Also, French Company has 10 000 shares outstanding. Today the price of the stock is $350. The expected market risk premium is 12% p.a., and the beta of the company's common stock is 0.4, while the risk-free rate is 6% p.a. Calculate the company's after-tax WACC (weighted average cost of capital), assuming the company pays tax at a 35% rate. b) Assume, that in future French Company doubles its debt. How will this decision affect the company's cost of capital? Will this decision lead to a rise in the company's value? Explain.
5 "In dividend valuation model of stock price we do not pay attention to capital gain of selling stock." Is this statement true or false? Explain. 6 a) French Company decided to take a $1.5 mln bank loan, as the bank is offering a good interest rate of 9% p.a. Also, French Company has 10 000 shares outstanding. Today the price of the stock is $350. The expected market risk premium is 12% p.a., and the beta of the company's common stock is 0.4, while the risk-free rate is 6% p.a. Calculate the company's after-tax WACC (weighted average cost of capital), assuming the company pays tax at a 35% rate. b) Assume, that in future French Company doubles its debt. How will this decision affect the company's cost of capital? Will this decision lead to a rise in the company's value? Explain.
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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Transcribed Image Text:5
"In dividend valuation model of stock price we do not pay attention to capital gain of selling stock."
Is this statement true or false? Explain.
6
a) French Company decided to take a $1.5 mln bank loan, as the bank is offering a good interest rate of
9% p.a. Also, French Company has 10 000 shares outstanding. Today the price of the stock is $350. The
expected market risk premium is 12% p.a., and the beta of the company's common stock is 0.4, while the
risk-free rate is 6% p.a. Calculate the company's after-tax WACC (weighted average cost of capital),
assuming the company pays tax at a 35% rate.
b) Assume, that in future French Company doubles its debt. How will this decision affect the company's
cost of capital? Will this decision lead to a rise in the company's value? Explain.
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