7. ABC Corp has 1.4 million shares common valued at $20 per share =$28 million. Debt has face value of $5 million and trades at 93% of face ($4.65 million) in the market. Total market value of both equity + debt thus =$32.65 million. Equity % = .8576 and Debt % = .1424 Risk free rate is 4%, risk premium -7% and ABC's B-.74 Current yield on market debt is 11%; Tax rate is 40% . Find out the Return on equity, Return on debt and WACC.

7. ABC Corp has 1.4 million shares common valued at $20 per share =$28 million. Debt has face value of $5 million and trades at 93% of face ($4.65 million) in the market. Total market value of both equity + debt thus =$32.65 million. Equity % = .8576 and Debt % = .1424 Risk free rate is 4%, risk premium -7% and ABC's B-.74 Current yield on market debt is 11%; Tax rate is 40% . Find out the Return on equity, Return on debt and WACC.

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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Mf3. Equity capital of a corporation R. is represented by 100 shares. Current stock price is $44 per share. R. partly finances its operations by perpetual riskless debt with a coupon rate of 6% which is traded at 120% of par. The market value of debt is 2000. Corporate tax rate is 57%. Shareholders income consists by dividend payments and capital gains. Dividends account for 1/3 of shareholders’ income and capital gains are 2/3. Personal dividend tax is 50% and capital gains tax is 20%. You also know that personal interest income tax is 25%. After the last shareholders meeting, a new CEO was appointed – she hates to use debt in the capital structure and going to issue additional equity to retire half of its leverage. 4.1. How many shares will be issued to undertake described recapitalization plan? 4.2. Determine the value of equity after debt is retired; 4.3. Explain what will happen to equity required return after capital structure change.
You are given the following information regarding UFSK limited, a listed entity. •i ea\rmoo Number of outstanding shares 100 000 Earnings 300 000 Retention ratio 91-day Treasury bill rate Market risk premium UFSK Beta Dividend growth rate stable phase 5% Bonds outstanding Par value per bond Semi-annual coupon rate on bonds 6% Bond yield to maturity 60% 6% 8% 1.2 5 000 1000 8% Bond years remaining to maturity 4 Corporate tax rate 30% Additional information • UFSK limited recently paid a dividend • UFSK recently signed a deal and expects a super normal growth in earnings. The company expects earnings to grow by 8% for the first two years then decline by 2% in the following year, there after a stable growth of 5% is expected into the future. Required: a) As an investment analyst advise your client how much must she expect to pay for UFSK limited stock. b) Ascertain the market value of UFSK limited equity. c) Determine the fair value of UFSK limited bond d) Determine the total value of the…
You are given the following information regarding UFSK limited, a listed entity. Number of outstanding shares 100 000 Earnings 300 000 Retention ratio 60% 91-day Treasury bill rate 6% Market risk premium 8% UFSK Beta 1.2 Dividend growth rate stable phase 5% Bonds outstanding 5 000 Par value per bond 1000 Semi-annual coupon rate on bonds 6% Bond yield to maturity 8% Bond years remaining to maturity 4 Corporate tax rate 30% Additional information UFSK limited recently paid a dividend UFSK recently signed a deal and expects a super normal growth in earnings. The company expects earnings to grow by 8% for the first two years then decline by 2% in the following year, there after a stable growth of 5% is expected into the future. Required: a) As an investment analyst advise your client how much must she expect to pay for UFSK limited stock. b) Ascertain the market value of UFSK limited equity. c) Determine the fair value of UFSK limited bond d) Determine the total value of the company's debt…
EPS, Debt-to-Equity, Breakeven point LexMart maintains a debt-to-equity ratio of 1.0 regardless of whether the firm experiences expansion or contraction. At the present time, LexMart has $1,000 par value bonds outstanding that pay 10% annual interest. The firm also has 2.3 million shares of common stock outstanding that sells for $23 per share. a. Based on LexMart's current annual NOP of $20,000,000 and its corporate tax rate of 30%, what is its EPS? b. If LexMart would like to finance a $61 million expansion while maintaining it's current debt-to-equity ratio of 1.0, how many bonds at $1,000 per bond and shares of stock will it have to sell to pay for the expansion? c. After the expansion, what level of annual NOP will LexMart have to generate to maintain its current level of EPS? a. LexMart's current EPS is $ (Round to three decimal places.)
10. Assume UK company JUP has debt with a book value of £24 million, trading at 120% of par value. The firm has book value of equity of £28 million, and 2 million shares trading at £20 per share. What weights should JUP use in calculating its WACC? A. 41.86% for debt, 58.14% for equity B. 37.67% for debt, 62.33% for equity C. 33.49% for debt, 66.51% for equity D. 29.30% for debt, 70.70% for equity
You are given the following information regarding UFSK limited, a listed entity. Number of outstanding shares 100 000 Earnings 300 000 Retention ratio 60% 91-day Treasury bill rate 6% Market risk premium 8% UFSK Beta 1.2 Dividend growth rate stable phase 5% Bonds outstanding 5 000 Par value per bond 1000 Semi-annual coupon rate on bonds 6% Bond yield to maturity 8% Bond years remaining to maturity 4 Corporate tax rate 30% Additional information UFSK limited recently paid a dividend UFSK recently signed a deal and expects a super normal growth in earnings. The company expects earnings to grow by 8% for the first two years then decline by 2% in the following year, there after a stable growth of 5% is expected into the future. Required: As an investment analyst advise your client how much must she expect to pay for UFSK limited stock. Ascertain the market value of UFSK…
19) Ye are given the following information regarding UFSK limited, a listed entity. UO yM Numuer of outstanding shares 100 000 Earnings 300 000 Retention ratio 60% 91-day Treasury bill ate 6% Market risk premium 8% UFSK Beta 1.2 Dividend growth rate stable phase 5% Bonds outstanding 5 000 L Par value per bond 1000 Semi-annual coupon rate on bonds 6% Bond yield to maturity 8% Bond years remaining to maturity Corporate tax rate 30% Additional information UFSK limited recently paid a dividend • UFSK recently signed a deal and expects a super normal growth in earnings. The company expects earnings to grow by 8% for the first two years then decline by 2% in the following year, there after a stable growth of 5% is expected into the future. Required: a) As an investment analyst advise your client how much must she expect to pay for UFSK limited stock. b) Ascertain the market value of UFSK limited equity. c) Determine the fair value of UFSK limited bond d) Determine the total value of the…
Estimating Components of both WACC and DDMAn analyst estimates the cost of debt capital for Abbott Laboratories is 3.0% and that its cost of equity capital is 5.0%. Assume that ABT’s statutory tax rate is 21%, the risk-free rate is 2.1%, the market risk premium is 5%, the ABT market price is $84.10 per common share, and its dividends are $1.28 per common share.(a) Compute ABT’s average pretax borrowing rate and its market beta. (Round your answers to one decimal place.) Average borrowing rate = Market beta = (b) Assume that its dividends continue at the current level in perpetuity. Use the constant perpetuity dividend discount model to infer the market's expected cost of equity capital. (Hint: Use Price per share = Dividends per share/Cost of equity capital.) (Round your answer to one decimal place.)

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