A firm has 10,000,000 shares of common stock outstanding, each with a market price of $15.00 per share. It has 80,000 bonds outstanding, each selling for $1020. The bonds mature in 15 have a coupon rate of 9%, and pay coupons semi-annually. The firm's equity has a beta of 1.9, and the expected market return is 10%. The tax rate is 30% and the risk-free rate is 4%. years, a) What is the total market value of common stocks? b) What is the total market value of bonds? c) What is the cost of equity? d) What is the cost of debt? What is the cost of capital for the firm?|

A firm has 10,000,000 shares of common stock outstanding, each with a market price of $15.00 per share. It has 80,000 bonds outstanding, each selling for $1020. The bonds mature in 15 have a coupon rate of 9%, and pay coupons semi-annually. The firm's equity has a beta of 1.9, and the expected market return is 10%. The tax rate is 30% and the risk-free rate is 4%. years, a) What is the total market value of common stocks? b) What is the total market value of bonds? c) What is the cost of equity? d) What is the cost of debt? What is the cost of capital for the firm?|

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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Company A just paid dividends of $4 per share. Company A will increase its dividends by 5% every year with no end. Company A pays dividends once per year, occurring at the end of the tear The standard deviation for Company A’s stock returns is 30% and its covariance with the market is 0.10. The expected return on the market portfolio is 15%, and the standard deviation of the market portfolio is 25%. The bond yield for government bonds is 4%. Using the dividend discount model and the capital asset pricing model to estimate the appropriate discount rate, what should be Company A’s share price?
We have the following information for the Valverde company. The stock pays a $10 dividend, and it will grow by 100% the first year, 30% the second year and 3% forever after that. You know the ROR in the S&P 500 is 11%, the Bheta is 1.2 and the Treasury bond rate is 4%. Derive the value of Valverde.
A firm can issue a 15-year, $1,000 par value bond with a 10% coupon rate, paying interest semiannually, at a price of $862.35. Their marginal tax rate is 40%. A dividend of $1.25 was just paid on the firm's common stock, and the firm's estimated growth rate is 8%. It can issue new common stock at $25.00 with a 20% floatation cost. The Risk-Free Return is 6%, the Market Return is 12%, and the firm's beta is 1.2. A) Calculate the firm's Cost of Debt, after Tax. B) Calculate the firm's Cost of Retained Earnings using the CAPM. C) Calculate the firm's Cost of new Common Stock. D) A firm has the following component costs of capital: Cost of Debt (after-tax): 10.5% Cost of Retained Earnings: 15.0% It's target capital structure is: Debt 40% Retained Earnings: 60% Estimate the firm's Weighted Average Cost of Capital (WACC)
Your company follows a constant debt-to-equity ratio policy. Its debt is represented by a single zero coupon bond, with maturity one year, with face value 28,000,000 and whose value today is 24,500,000. The value of the firm’s assets in one year can be 55,000,000 with probability 40%, or 23,000,000 with probability 60%. If the unlevered return on equity is 8.50%, what is the expected return on levered equity? (Assume a Modigliani Miller world without taxation). The answer is 27.13% but how do you get to this result?
Your company follows a constant debt-to-equity ratio policy. Its debt is represented by a single zero coupon bond, with maturity one year, with face value 28,000,000 and whose value today is 24,500,000. The value of the firm’s assets in one year can be 55,000,000 with probability 40%, or 23,000,000 with probability 60%. If the unlevered return on equity is 8.50%, what is the expected return on levered equity? (Assume a Modigliani Miller world without taxation). rE=27.13% Give typing answer with explanation and conclusion
1. Sleeping Time has 8,000 bonds outstanding that are selling at 90% of par value. The bonds are issued with 8% annual coupon that matures in 15 years. The company also has 400,000 shares of common stock outstanding. The stock has a beta of 1.5 and sells for $30 a share. The U.S. Treasury bill is yielding 3% and the average return on market is 8%. Sleeping Time falls under 40% tax bracket. Required: What is Sleeping Time's weighted average cost of capital?
XYZ currently has common stock trading at $40 per share. XYZ just paid a dividend of $2.00 per share, which is expected to grow at a constant rate of 5%. XYZ's beta is 1.5, the risk-free rate is 2%, and the market return is expected to be 8%. The pre-tax yield on XYZ's bonds is 7%. XYZ's finance department believes that new stock would require a premium of 5% over their own bond yield. Flotation cost for issuing new stock is 10%. Compute the cost of retained earnings using the bond yield plus risk premium approach (show your answer in percent, and to 2 decimal places. Example: 9.62%). Question 4 options:
ABC International has an unlevered cost of capital of 10 %, a tax rate of 35 %, and expected earnings before interest and taxes of $26,500. The company has $40,000 in bonds outstanding that have a 7% coupon and pay interest annually. The bonds are selling at par value. What is the cost of equity?
Running Shoes, Inc. has 2 million shares of stock outstanding. The stock currently sells for $15 per share. The firm's debt is publicly traded and has five years until maturity. The current value of the firm's bonds is $14.1016 million with a yield to maturity of 8%. The risk free rate is 2% and the market risk premium is 9%. You've estimated that the firm has a beta of 1.7. The corporate tax rate is 30%. Hint: find the market value of the debt. What percentage of Running Shoes, Inc. is financed with debt? (Answer in decimal form)
Spartan Machinery stock trades at $60 per share with a beta of 1.5, an estimated market return of 12%, and a risk free rate of 5%. There are 20 million shares outstanding. The company has bonds with a face value $1 billion outstanding and a market value of $980 million. The coupon rate is 9% (semiannual coupons) and there are 10 years to maturity. The company has a tax rate of 38%. What is the WACC?
A firm has 5 million shares of stock outstanding and 63.000 number of 6.80% annual coupon bonds outstanding. par value is $700 each. The stock currently sells for $19 per share and has a beta of 1.57, and the bonds have 8 years to maturity and sell for 96% of par, and their yield to maturity is 7.48%. The expected return on the market portfolio is 11%, T-bills are yielding 4%, and the firm's tax rate is 35%. What is the firm's market value capital structure ( in terms of Debt/Equity ratio) and WACC?

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