8. You have the following information about Burgundy Basins, a sink manufacturer. Equity shares outstanding Stock price per share Yield to maturity on debt Book value of interest-bearing debt Coupon interest rate on debt Market value of debt 20 million $40.00 7.5% $320 million 4.8% $290 million $500 million Book value of equity Cost of equity capital Tax rate 14% 35% Burgundy is contemplating what for the company is an average-risk investment costing $40 million and promising an annual ATCF of $6.4 million in perpetuity. a. What is the internal rate of return on the investment? b. What is Burgundy's weighted-average cost of capital? c. If undertaken, would you expect this investment to benefit share- holders? Why or why not?

8. You have the following information about Burgundy Basins, a sink manufacturer. Equity shares outstanding Stock price per share Yield to maturity on debt Book value of interest-bearing debt Coupon interest rate on debt Market value of debt 20 million $40.00 7.5% $320 million 4.8% $290 million $500 million Book value of equity Cost of equity capital Tax rate 14% 35% Burgundy is contemplating what for the company is an average-risk investment costing $40 million and promising an annual ATCF of $6.4 million in perpetuity. a. What is the internal rate of return on the investment? b. What is Burgundy's weighted-average cost of capital? c. If undertaken, would you expect this investment to benefit share- holders? Why or why not?

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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Assume perfect capital markets. A firm has a market value of $30, 000 and debt of $7, 500 horrowed at 7%. The return on equity is 18%. What is the return on equity if the firm was unlevered? (Hint: Think about WACC, WACCL = WACCU)
Hamada equation Original % debt in capital structure, wd Original % common equity in capital structure, wc Risk-free rate, TRF Market risk premium, RPM Tax rate, T Firm's cost of equity, rs Calculation of firm's current beta: Firm's current beta, b Calculation of firm's unlevered beta: Firm's unlevered beta, bu New % of debt in capital structure, Wd New New % of common equity in capital structure, Wc New Calculation of firm's new beta: Firm's new beta, bL New Calculation of firm's new cost of equity: Firm's new cost of equity, rs New 30.00% 70.00% 5.00% 7.00% 40.00% 14.00% 50.00% 50.00% Formulas #N/A #N/A #N/A #N/A
You were hired as a consultant to Quigley Company, whose target capital structure is 35% debt, 10% preferred, and 55% common equity. The interest rate on new debt is 6.50%, the yield on the preferred is 6.00%, the cost of retained earnings is 11.25%, and the tax rate is 40%. The firm will not be issuing any new stock. What is Quigley's WACC? a. 10.11% b. 8.15% c. 9.28% d. 7.75%
Corporate Finance Consider a company where the market value of debt and equity are 25% and 75%,respectively of total Enterprise Value. The company’s debt yields 200bps over the risk free interest rate of 5.25%. The company’s tax rate is 21%. The beta of the company’s stock is 1.2. Assuming the equity risk premium is 4.5%, what is the company’s after-tax WACC?
K SIROM Scientific Solutions has $4 million of outstanding equity and $12 million of bank debt. The bank debt costs 5% per year. The estimated equity beta is 1. If the market risk premium is 9% and the risk - free rate is 4%, compute the weighted average cost of capital if the firm's tax rate is 25%. OA. 6.71% OB. 5.8% C. 5.49% D. 6.1%
A company is considering its optimal capital structure. The firm currently has 1 million shares outstanding at $ 20 per share (tax rate = 40%) and a debt balance of $5 million. Currently, its (levered) beta is 1.5 and its ERP is 5.5%. The current risk-free rate is 5%. Your research indicate the following ratings and pre-tax cost of debt across the different debt ratios: D/(D+E) Rating Pre-tax cost of debt 0% AAA 10% 10% AA 10.5% 20% A 11% 30% BBB 12% 40% BB 13% 50% B 14% 60% CCC 16% 70% CC 18% 80% C 20% 90% D 25% a. Using the optimal WACC approach, what is the firm's optimal debt ratio? b. Calculate the company's unlevered value, assuming that the probability of default is 5% and the company loses 30% of its value in the event of a default.
What is the cost of equity based on the dividend growth model? What is the cost of equity based on the security market line? What market weights should be given to the various capital components in the weighted average cost of capital computation What is the weighted average cost of capital using the cost equity calculated based on CAPM?
Consider a simple firm that has the following market-value balance sheet: Assets Liabilities end equity $1 040 Debt Equity $400 640 Next year, there are two possible values for its assets, each equally likely: $1 180 and $960. Its debt will be due with 4.9% interest. Because all of the cash flows from the assets must go to either the debt or the equity, if you hold a portfolio of the debt and equity in the same proportions as the firm's capital structure, your portfolio should earn exactly the expected return on the firm's assets. Show that a portfolio invested 38% in the firm's debt and 62% in its equity will have the same expected return as the assets of the firm. That is, show that the firm's pre-tax WACC is the same as the expected return on its assets. If the assets will be worth $1 180 in one year, the expected return on assets will be %. (Round to one decimal place.)
Stevenson's Bakery is an all-equity firm that has projected perpetual EBIT of $183,000 per year. The cost of equity is 13.1 percent and the tax rate is 21 percent. The firm can borrow perpetual debt at 6.3 percent. Currently, the firm is considering converting to a debt–equity ratio of .93. What is the firm's levered value? MM assumptions hold. A. $829,786 B. $1,215,262 C. $1,155,579 D. $997,511 E. $921,985
Answer the following questions given the information below: Equity Information 40 million shares $100 per share Beta = 1.15 Market risk premium = 8% Risk-free rate = 3% Debt Information $1 billion in outstanding debt (face value) YTM = 9% What is the cost of equity? What is the cost of debt? What is the after-tax cost of debt? What are the capital structure weights? What is the WACC?
You have the following information about Burgundy Basins, a sink manufacturer. Equity shares outstanding 20 million Stock price per share $ 42 Yield to maturity on debt 6.5 % Book value of interest-bearing debt $ 365 million Coupon interest rate on debt 4.7 % Market value of debt $ 260 million Book value of equity $ 440 million Cost of equity capital 12.4 % Tax rate 35 % Burgundy is contemplating what for the company is an average-risk investment costing $44 million and promising an annual ATCF of $5.2 million in perpetuity. a. What is the internal rate of return on the investment? (Round your answer to 2 decimal places.) b. What is Burgundy's weighted-average cost of capital? (Round your answer to 2 decimal places.)

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