13.9Problem:A relatively small medical group practice is trying to estimate its CCC. The practice 100 percent equity financed. The rate of return on 20-year Treasurybonds is currently 4 percent, and the expected rate of return on the market is 8 percent. A large practice management firm has a beta coefficient of 0.9.Market research indicates that the cost of equity for very small firms is approximately 4 percentage points higher than the cost of equity for large firms.Moreover, the investors in the small group practice face liquidity risk and thus determine that a liquidity premium of 2 percentage points is appropriate.Equity FinancedRate of Return TBRate of Return MarketBig Firm BetaSmall Firm Cost of EquityLiquidity Premium100%4%8%0.94.0%2%a. What is the best estimate of the firm's CCC?Cost of Equity/CapitalEst Cost of Equity/Capitalb. How would your estimate of the CCC change if the success of the medical group practice was highly dependent on the reputation of a single physician in thegroup?The firm faces additional risk factor known as key person risk because the success of the form is dependent on a single physicians reputation

The CCC is broken into 3 parts:1. Cost of equity using CAPMCost of equity = Riskfree rate + beta…

Answered: a. What is the best estimate of the…

Business

Finance

a. What is the best estimate of the firm's CCC?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 7P

See similar textbooks

Similar questions

Hamada equation Original % debt in capital structure, wd Original % common equity in capital structure, wc Risk-free rate, TRF Market risk premium, RPM Tax rate, T Firm's cost of equity, rs Calculation of firm's current beta: Firm's current beta, b Calculation of firm's unlevered beta: Firm's unlevered beta, bu New % of debt in capital structure, Wd New New % of common equity in capital structure, Wc New Calculation of firm's new beta: Firm's new beta, bL New Calculation of firm's new cost of equity: Firm's new cost of equity, rs New 30.00% 70.00% 5.00% 7.00% 40.00% 14.00% 50.00% 50.00% Formulas #N/A #N/A #N/A #N/A
Solve the below problem as soon as possible quickly.
Situational Software Co. (SSC) is trying to establish its optimalcapital 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 4%; the market risk premium, RPM, is 5%; and the firm’s tax rate is 40%. Currently,SSC’s cost of equity is 12%, which is determined by the CAPM. What would beSSC’s estimated cost of equity if it changed its capital structure to 40% debt and60% equity?
son.2
13. As a consultant to First Responder Inc., you have obtained the following data (dollars in millions). The company plans to pay out all of its earnings as dividends, hence g = 0. Also, no net new investment in operating capital is needed because growth is zero. The CFO believes that a move from zero debt to 15.0% debt would cause the cost of equity to increase from 10.0% to 13.0%, and the interest rate on the new debt would be 9.0%. What would the firm's total market value be if it makes this change? Hints: Find the FCF, which is equal to NOPAT = EBIT(1 - T) because no new operating capital is needed, and then divide by (WACC - g). Do not round your intermediate calculations. Oper. income (EBIT) $800 Таx rate 40.0% New cost of equity (rs) 13.00% New wd 15.0% Interest rate (rd) 9.00% a. $4,047 b. $4,371 c. $3,076 d. $3,966 e. $4,452 14. Carlyle Inc. is considering two mutually exclusive projects. Both require an initial investment of $14,800 at t = 0. Project S has an expected life of…
Help me please
You are a venture capitalist and have been approached by Cirrus Electronics, aprivate firm. The firm has no debt outstanding and does not have earnings now but isexpected to be earning $15 million in four years, when you also expect it to go public.The average price-earnings ratio of other firms in this business is 50.a. Estimate the exit value of Cirrus Electronics.b. If your target rate of return is 35 percent, estimate the discounted terminal valueof Cirrus Electronics.c. If you are contributing $75 million of venture capital to Cirrus Electronics, at aminimum what percentage of the firm value would you demand in return?
13. Start-up Industries is a new firm, which has raised $100 million by selling shares of stock. Management expects to earn a 24% rate of return on equity, which is more than the 15% rate of return available on comparable-risk investments. Half of all earnings will be reinvested in the firm. a. What will be Start-up’s ratio of market value to book value? b. How would that ratio change if the firm can earn only a 10% rate of return on its investments? (Round your answer to 1 decimal place.)
Situational Software Co. (SSC) is trying to establish its optimal capital structure. Its current capital structure consists of 30% debt and 70% equity; however, the CEO believes that the firm should use more debt. The risk-free rate, FRF, is 5%; the market risk premium, RPM, is 5% ; and the firm's tax rate is 25%. Currently, SSC's cost of equity is 15%, which is determined by the CAPM. What would be SSC's estimated cost of equity if it changed its capital structure to 50% debt and 50% equity? Do not round intermediate Round your answer to two decimal places. calculations. % 4
Sub : FinancePls answer very fast.I ll upvote. Thank You An all-equity company decides to recapitalize. The company has an unlevered beta of 1.1, the market risk premium is 6% and the risk-free rate is 5%. The company's tax rate is 25%. If the company starts to borrow with a 25% debt ratio, what will be the levered beta using Hamada’s equation? What is the cost of equity before and after the recapitalization respectively? Why is the cost of equity higher after the recapitalization?
Q. Suppose a company uses only debt and internal equity to finance its capital budget and uses CAPM to compute its cost of equity. Company estimates that its WACC is 12%. The capital structure is 75% debt and 25% internal equity. Before tax cost of debt is 12.5 % and tax rate is 20%. Risk free rate is rRF = 6% and market risk premium (rm - rRF ) = 8%: What is the beta of the company?
use excel and explain step by step