Big Door Company has 8.7 million shares outstanding, which are currently trading for about $13 per share and have a levered equitybeta of 1.2. Big Door has 19,900 outstanding bonds, with a 4% coupon rate, payable semi-annually and due in 10 years. The bonds arerated BBB. Currently the credit spread for BBB is 178 basis points over equivalent-maturity Government of Canada debt. The currentyield on 10-year Canada bonds is 5%, compounded semi-annually. The risk-free interest rate is 2%, and the market risk premium is6.6%. The company has a 35% tax rate. (Do not round intermediate calculations.)a. Calculate Big Door's WACC. (Round your answer to 2 decimal places.)WACCb. Calculate Big Door's unlevered beta, using the following formula: (Round your answer to 2 decimal places.)Pleveret Pdebtx (1–Tc)×D/EBU1+(1–Tc)×D/EesUnlevered betac. If Big Door was 50% debt-financed, what would be its WACC? Assume that the beta of its debt is unchanged by the capital structurechange. (Round your answer to 2 decimal places.)WACC

WACC: Weighted Average Cost of Capital represents the firm's total cost of capital. It is computed…

a. Calculate Big Door's WACC. (Round your answer to 2 decimal places.) WACC b. Calculate Big Door's unlevered beta, using the following formula: (Round your answer to 2 decimal places.) Pleveret Pdebtx (1–Tc)×D/E 1+(1-Tc)xD/E Bu = Unlevered beta c. If Big Door was 50% debt-financed, what would be its WACC? Assume that the beta of its debt is unchanged by the capital structure change. (Round your answer to 2 decimal places.)

a. Calculate Big Door's WACC. (Round your answer to 2 decimal places.) WACC b. Calculate Big Door's unlevered beta, using the following formula: (Round your answer to 2 decimal places.) Pleveret Pdebtx (1–Tc)×D/E 1+(1-Tc)xD/E Bu = Unlevered beta c. If Big Door was 50% debt-financed, what would be its WACC? Assume that the beta of its debt is unchanged by the capital structure change. (Round your answer to 2 decimal places.)

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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Question

Big Door Company has 8.7 million shares outstanding, which are currently trading for about $13 per share and have a levered equity
beta of 1.2. Big Door has 19,900 outstanding bonds, with a 4% coupon rate, payable semi-annually and due in 10 years. The bonds are
rated BBB. Currently the credit spread for BBB is 178 basis points over equivalent-maturity Government of Canada debt. The current
yield on 10-year Canada bonds is 5%, compounded semi-annually. The risk-free interest rate is 2%, and the market risk premium is
6.6%. The company has a 35% tax rate. (Do not round intermediate calculations.)
a. Calculate Big Door's WACC. (Round your answer to 2 decimal places.)
WACC
b. Calculate Big Door's unlevered beta, using the following formula: (Round your answer to 2 decimal places.)
Pleveret Pdebtx (1–Tc)×D/E
BU
1+(1–Tc)×D/E
es
Unlevered beta
c. If Big Door was 50% debt-financed, what would be its WACC? Assume that the beta of its debt is unchanged by the capital structure
change. (Round your answer to 2 decimal places.)
WACC

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M12-15. Estimating Cost of Equity Capital Assume that a company’s market beta equals 0.6, the risk-free rate is 5%, and the market return equals 13%. Compute the company’s cost of equity capital. Round answer to one decimal place (ex: 0.0245 = 2.5%) Answer%
Finance
An all-equity firm is considering the following projects: Project Beta IRR W .58 X .87 Y 1.13 Z 1.47 9.0% 9.7 12.1 15.2 The T-bill rate is 4.2 percent and the expected return on the market is 11.2 percent. a. Compared with the firm's 11.2 percent cost of capital, Project W has a expected return, Project Y has a expected return. expected return, Project X has a expected return, and Project Z has a
4. We only have OMR 800,000 to invest. Which do we select based on Weighted average profitability index method ? Project NPV Investment PI A 430,000 500,000 B 241,250 225,000 C 394,250 375,000 D 262,000 575,000
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)
h. Calculate the total return % in each of the following instances: a. Do = $2.00, dividend growth = 4%, Po = $50, P: = $60 b. Po = $32, Dividend yield % = 5%, P1 = $30 c. Dividend Yield = 4%; Capital Gain = %3D $20; DI = $4
Suppose that you have the following utility function: U=E(r) – ½ Aσ2 and A=3 Suppose that you have $10 million to invest for one year and you want to invest that money into ETFs tracking the S&P 500 (US) and S&P/TSX 60 (Canada) index, which are often used as proxies for the US and Canadian stock markets, respectively, and the Canadian one-year T-bill. Assume that the interest rate of the one-year T-bill is 0.35% per annum. You have found two ETFs that you are interested in. From a set of their historical data between 2001 and 2019, you have estimated the annual expected returns, standard deviations, and covariance as follows: ETFUS : E(r)= 0.070584 0.173687 ETFCDA : E(r)= 0.073763 0.16816 Covariance between ETFUS and ETFCDA = 0.02397 Answer the following questions using Excel: What is the optimal portfolio of ETFUS and ETFCDA? Also submit an Excel file to show your work.
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