26. A company has: a geared cost of equity of 12%; an ungeared cost of equity of 10%, aWACC of 9.25%; market value of equity of $210 million; market value of debt of $70million a tax rate of 30%.The company plans to raise $20 million of debt and use these funds to repurchase shares.According to Modigliani and Miller's theory with tax, WACC would move to:

Ungeared cost of equity keu = 10% Geared cost of equity ke = 12% WACC = 9.25% Market value equity…

Answered: A company has: a geared cost of equity…

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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Raghubhai
Baghiben
Suppose that B2B, Incorporated has a capital structure of 37 percent equity, 17 percent preferred stock, and 46 percent debt. Assume the before-tax component costs of equity, preferred stock, and debt are 15.0 percent, 12.0 percent, and 10.0 percent, respectively. What is B2B's WACC if the firm faces an average tax rate of 21 percent and can make full use of the interest tax shield? Note: Round your answer to 2 decimal places. WACC %
Suppose that TipsNToes, Inc.'s capital structure features 75 percent common equity, 25 percent debt, and its cost of equity is 12 percent, while its before-tax cost of debt is 10 percent. It has no preferred stock. If the appropriate tax rate is 40%, what will be TipsNToes's after-tax WACC?
The firm is financed with debt and equity. The book value of the debt is $10,000,000; the book value of the equity is $30,000,000. The stockholders require an 10.1% return. If the required return on the firm’s debt is 4% and the firm’s tax rate is 20%, what is the firm’s weighted average cost of capital (WACC)?
If its current tax rate is 40%, Turnbull’s weighted average cost of capital (WACC) will be (1.23 / 1.07 / 1.44 / 0.91) higher if it has to raise additional common equity capital by issuing new common stock instead of raising the funds through retained earnings. Turnbull Company is considering a project that requires an initial investment of $1,708,000.00. The firm will raise the $1,708,000.00 in capital by issuing $750,000.00 of debt at a before-tax cost of 9.60%, $78,000.00 of preferred stock at a cost of 10.70%, and $880,000.00 of equity at a cost of 13.50%. The firm faces a tax rate of 40%. The WACC for this project is (6.48 / 9.97 / 6.98 / 8.47) .
There are two firms in the same business: Air Wolf and Red Wolf. Both are in the same risk class, and each has an EBIT (Earnings Before Interest & Taxes) of $10 million. Air Wolf has no debt and Red Wolf has $4 million of debt. The cost of equity is 8% and the cost of debt is 10%. Assume a tax rate of 30%. Calculate the: (a) total value of each firm and (b) the breakdown of value or capital structure in terms of its components (debt & equity).
Consider a firm with an EBIT of $868,000. The firm finances its assets with $2,680,000 debt (costing 8.2 percent and is all tax deductible) and 580,000 shares of stock selling at $6.00 per share. To reduce the firm's risk associated with this financial leverage, the firm is considering reducing its debt by $1,000,000 by selling an additional 380,000 shares of stock. The firm's tax rate is 21 percent. The change in capital structure will have no effect on the operations of the firm. Thus, EBIT will remain at $868,000. Calculate the change in the firm's EPS from this change in capital structure. Note: Do not round intermediate calculations and round your final answers to 2 decimal places. EPS before EPS after Difference
You expect that Tin Roof will generate a perpetual stream of EBIT at $92,000 annually. The firm's cost of debt is about 6.2 percent based on before tax YTMS. The firm's cost of equity is 11.4 percent based on CAPM. What is the value of the firm (in whole dollar) if corporate tax rate is 20 percent and the firm is financed with 40 percent debt and 60 percent equity? $819,623 $856,141 $834,088 $895,941 $861,439
Consider a firm with an EBITDA of $1,100,000 and an EBIT of $1,000,000. The firm finances its assets with $4,530,000 debt (costing 8.2 percent, all of which is tax deductible) and 202,000 shares of stock selling at $11 per share. To reduce risk associated with this financial leverage, the firm is considering reducing its debt by $2,530,000 by selling additional shares of stock. The firm’s tax rate is 21 percent. The change in capital structure will have no effect on the operations of the firm. Thus, EBIT will remain at $1,000,000.Calculate the EPS before and after the change in capital structure and indicate changes in EPS. (Do not round intermediate calculations. Round your answers to 2 decimal places.)
Assume zero corporate tax rate. Acorn Industries owns assets that have 80% probability of having market value $50 million in one year and 20% probability of having market value $20 million in one year. The risk free rate is 4% and Acorn's assets have cost of capital 10%. (a) If Acorn is unlevered, what is the value of Acorn's equity? (b) What is the expected return on equity? (c) What is the volatility of the equity return? (d) What is the WACC?
Shaw Communications is currently financed with 30% equity, 10% preferred stock, and 60% debt. It has a cost of equity capital of 11%, a cost of preferred stock of 7.5%, and its pretax cost of debt is 6%. If the firm has a tax rate of 30%, what is Shaw's weighted average cost of capital (WACC) ?

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