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 $5 per share. Company A will increase its dividends by 5% every year forever. Company A pays dividends once per year, at the end of the year. The standard deviation for Company A’s stock returns is 35% and its covariance with the market is 0.15. The expected return on the market portfolio is 25%, and the standard deviation of the market portfolio is 35%. Bond yield for government bonds is 5%. According to dividend discount model and the capital asset pricing model to estimate the appropriate discount rate, What should be Company A’s share price?
A&P Inc., the grocery store chain, has 6 million shares of common stock outstanding which currently trade for $40 per share. The company also has 150,000 bonds each with a face value of $1,000 and annual coupons of $50. The bonds have 6 years to maturity and the next coupon is due in one year. The yield on the bonds is 5%. The company's beta is 1.05, the risk-free rate is 3%, and the expected return on the market is 8%. The tax rate is 35%. What is A&P's WACC? Express your answer in percentage form rounded to two decimal places. WACC = ?%
What is the WACC for a company with the following information: Equity Information: 50 million shares, $80 per share, Beta = 1.15, Market risk premium =9%, Risk-free rate = 5%. Debt Information: 1 million outstanding bonds with a face value of $1,000 each. Current Price = $1,100, Coupon rate = 9%, semiannual coupons, 15 years to maturity Tax rate = 20%
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?
Tyres Limited has asked you to calculate the return on its ordinary shares to help in its calculation of its weighted average cost of capital (WACC). Tyres has 10,000,000 ordinary shares on issue that have a beta of 1.63. The last dividend was $9.56, and dividends have been growing at 2.7% per year. If the risk-free rate is 1.98% and the return on the market is 9.1%. What is the required return on one of Tyres’s ordinary shares?.
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?
The expected return on the market is 12.36 %, the risk-free rate is 4.88 %, and the tax rate is 18.00 %. Semper Fun Sports has 310,000 common shares outstanding that are priced at $40.20 per share and have an expected return of 16.96 % and an expected real return of 14.62 %. Last year, Semper Fun Sports common stock had a return of 11.66 %. The company also has 411,000 shares of preferred stock outstanding that are priced at $15.50 per share and have an expected return of 13.36 % and an expected real return of 11.81%. Last year, Semper Fun Sports preferred stock had a return of 13.36%. Finally, the company has 10,000 bonds outstanding with a coupon rate of 9.69 %, yield-to-maturity of 4.70%, current yield of 8.44%, face value of $1,000.00, and price of $1,260.00. What is the weighted average cost of capital for Semper Fun Sports? 9.73% (plus or minus 0.02 percent) O 11.32% (plus or minus 0.02 percent) 12.21% (plus or minus 0.02 percent) 10.98% (plus or minus 0.02 percent) None of the…
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
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:
Handy Handbags (HH) recently paid a dividend of $2.00 (D0), which is expected to grow at 7%. HH’s stock price is $23, its beta is 1.6, the yield on its bonds is 12%, and the risk premium on the company’s own stock is 5%. The risk-free rate is 6% and the market risk premium is 4%. Flotation costs will be 10% if Handy issues new common stock. Using the discounted cash flow method, compute the cost of retained earnings for HH: Question 13 options: 13.3% 18.4% 16.3% 15.7%
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?
Sunburn Sunscreen has a zero coupon bond issue outstanding with a face value of $30,000 that matures in one year. The current market value of the firm's assets is $31,800. The standard deviation of the return on the firm's assets is 36 percent per year and the annual risk-free rate is 4 percent per year, compounded continuously. Based on the Black-Scholes model, what is the market value of the firm's equity and debt? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Equity Debt

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