A firm's true price-to-earnings ratio is 10. The firm does not have any leverage and its cost of capital is 8 percent. The firm's dividends grow at 3 percent forever. The firm is considering taking out a bank loan with an interest rate of 5 percent. The bank loan would increase the firm's leverage ratio from 0 to 40 percent. The firm's tax rate is 30 percent. What is the firm's true price-to-earnings (PE) ratio with the new capital structure (that is, with leverage)? 12.50 9.38 6.25 O 7.81 O 10.94

A firm's true price-to-earnings ratio is 10. The firm does not have any leverage and its cost of capital is 8 percent. The firm's dividends grow at 3 percent forever. The firm is considering taking out a bank loan with an interest rate of 5 percent. The bank loan would increase the firm's leverage ratio from 0 to 40 percent. The firm's tax rate is 30 percent. What is the firm's true price-to-earnings (PE) ratio with the new capital structure (that is, with leverage)? 12.50 9.38 6.25 O 7.81 O 10.94

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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An unlevered firm has a value of $800 million. An otherwise identical butlevered firm has $60 million in debt at a 5% interest rate, which is its pretax cost of debt. Its unlevered cost of equity is 11%. No growth is expected.Assuming the corporate tax rate is 35%, use the MM model with corporatetaxes to determine the value of the levered firm.
Leverage and the Cost of Capital. A firm currently has a debt-equity ratio of 1/2. The debt,which is virtually riskless, pays an interest rate of 6%. The expected rate of return on the equityis 12%. What would be the expected rate of return on equity if the firm reduced its debt-equityratio to 1/3? Assume the firm pays no taxes. (LO16-1)
Suppose Goodyear Tire and Rubber Company is considering divesting one of its manufacturing plants. The plant is expected to generate free cash flows of 51.54 million per year, growing at a rate of 2.4% per year. Goodyear has an equity cost of capital of 8,7%, a debt cost of capital of 6.7%, a marginal corporate tax rate of 38%, and a debt- equity ratio of 2.6. If the plant has average risk and Goodyear plans to maintain a constant debt equity ratio, what after tax amount must it receive for the plant for the divestiture to be profitable?
Consider this case: Globex Corp. has a capital structure that consists of 30% debt and 70% equity. The firm’s current beta is 1.25, but management wants to understand Globex Corp.’s market risk without the effect of leverage. If Globex Corp. has a 25% tax rate, what is its unlevered beta? 0.90 0.81 1.09 0.95
A company currently has a WACC of 10.6 percent and no debt. The tax rate is 21 percent. a. What is the company’s current cost of equity? b. If the firm converts to 40 percent debt with a cost of 6%, what will its cost of equity be? And the WACC? c. If the firm converts to 60 percent debt with a cost of 6% , what will its cost of equity be? And the WACC? d. What can you conclude from the values of the cost of equity and WACC obtained in b. and c. Please show excel formulas
You are analyzing the cost of debt for a firm. You know that the firm’s 14-year maturity, 8.2 percent coupon bonds are selling at a price of $790.40. The bonds pay interest semiannually. If these bonds are the only debt outstanding for the firm, answer the following questions - What is the after-tax cost of debt for this firm if it has a 30 percent marginal and average tax rate?
Wintermelon Corp.'s controller is considering a change in the capital structure consisting of 40% debt and 60% equity. Initially, Winter Melon Corp.'s tax rate is 40%, its beta is 2.5, and it has no debt. The risk-free rate is 3.0 percent and the market risk premium is 7.0 percent. What is the beta if the company did not resort to debt financing? * Your answer
12 d out of Your firm has expected profit before interest and taxes of R1 600. Your unlevered cost of capital is 13 per cent and your tax rate is 34 per cent. You have debt with both a book and a face value of R2 500. This debt has an 8 per cent coupon and pays interest annually. What is your weighted average cost of capital?
Costly Corporation is considering using equity financing. Currently, the firm's stock is selling for $31.00 per share. The firm's dividend (D0) is $3.00 with constant annual growth rate of 5.0%. If the firm issues new stock, the flotation costs would equal 10.0 percent of the stock's market value. The firm's marginal tax rate is 40%. What is the firm's cost of external equity?
A firm has zero debt in its capital structure. Its overall cost of capital is 10%. The firm is considering a new capital structure with 60% debt. The interest rate on the debt would be 8%. Assuming there are no taxes, its cost of equity capital with the new capital structure would be:
A company is trying to establish its optimal capital structure. Its current capital structure consists of 25% debt and 75% equity; however, the CEO believes that the firm should use more debt. The risk-free rate, rRF, is 6%; the market risk premium, RPM, is 6%; and the firm's tax rate is 40%. Currently, the company’s cost of equity is 14%, which is determined by the CAPM. What would be the companies estimated cost of equity if it changed its capital structure to 50% debt and 50% equity? Round your answer to two decimal places. Do not round intermediate steps.
Your company is financed 20% with riskless debt with a yield of 6% and 80% with equity with a cost of 14%. The corporate tax rate is 30%. a. What is the company's WACC at its existing capital structure? b. What would be the new WACC if it changes to being 40% debt financed?

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