ABC and XYZ are identical firms in all respects except for their capital structures. ABC is all-equity financed with $530,000 in stock. XYZ has the same total value but uses both stock and perpetual debt; its stock is worth $310,000 and the interest rate on its debt is 7.9 percent. Both firms expect EBIT to be $62,222. Ignore taxes. Compute the costs of equity for both ABC and XYZ.
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ABC and XYZ are identical firms in all respects except for their capital structures. ABC is all-equity financed with $530,000 in stock. XYZ has the same total value but uses both stock and perpetual debt; its stock is worth $310,000 and the interest rate on its debt is 7.9 percent. Both firms expect EBIT to be $62,222. Ignore taxes. Compute the
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- ABC co and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all equity financed with $780,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $390,000 and the interest rate on its debt is 8 percent. Both firms expect EBIT to be $87,000. Ignore taxes. (SHOW YOUR WORK) What is the cost of equity for ABC? What is it for XYZ? What is the WACC for ABC? For XYZ? What principle have you illustrated?ABC Company and XYZ Company are identical firms in all respects except for their capital structure. ABC is all - equity financed with $650,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $325,000 and the interest rate on its debt is 6.5 percent. Both firms expect EBIT to be $ 71,000. Ignore taxes. What is the cost of equity for ABC and XYZ?Consider two firms that are identical in every respect EXCEPT for their capital structures. The unlevered firm is financed entirely by equity whereas the capital structure of the levered firm includes $30,000 of debt at 12%.The annual earnings of both companies before interest are the same, $10,000. The cost of equity in the unlevered firm is 15% and in the levered company at 16%. A) Determine the market values of the two companies. B) Suppose an investor owns 1% of the equity in the levered firm, describe the arbitrage process.
- Honeycutt Co. is comparing two different capital structures. Plan I would result in 12,700 shares of stock and $109,250 in debt. Plan II would result in 9,800 shares of stock and $247,000 in debt. The interest rate on the debt is 10 percent. The all-equity plan would result in 15,000 shares of stock outstanding. Ignore taxes for this problem. a. What is the price per share of equity under Plan I? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the price per share of equity under Plan II? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) a. Price per share b. Price per shareAbacus Calculation Company and Zoom Calculators Inc. are identical except for capital structures. Abacus has 50% debt and 50% equity, whereas Zoom has 30% debt and 70% percent equity. The borrowings rate for both companies is 8% in a no tax world, and capital markets are assumed to be perfect. i. If you own 4 percent of the stock of Abacus, what is dollar return if the company has net operating income of $3,60000 and the overall capitalization rate of the company is 18%? ii. What is the implied required rate of return on equity? Zoom has the same net operating income as Abacus. What is the implied required equity return of Zoom? Why does it differ from that of Abacus?ABC company and XYZ company have identical assets and currently they both have a debtequity ratio of 1. Both companies have a cost of riskless debt of 4% and return on equity of 20%. Expectedrate of return on market portfolio is 14% and firms are not subject to any taxes in this economy.a) ABC company decides to change its debt-equity ratio to 0.5 by issuing equity and retiring debt. Whatis its cost of equity after capital restructuring?b) XYZ company decides to change its debt-equity ratio to 2 by issuing debt and retiring equity. At thispoint, debt becomes risky and has a beta of 0.54, What is its cost of equity after capital restructuring? (Hint: You can use CAPM to estimate cost of riskydebt)
- The Rivoli Company has no debt outstanding, and its financial position is given by the following data: What is Rivoli’s intrinsic value of operations (i.e., its unlevered value)? What is its intrinsic stock price? Its earnings per share? Rivoli is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 30% debt based on market values, its cost of equity, rs, will increase to 12% to reflect the increased risk. Bonds can be sold at a cost, rd, of 7%. Based on the new capital structure, what is the new weighted average cost of capital? What is the levered value of the firm? What is the amount of debt? Based on the new capital structure, what is the new stock price? What is the remaining number of shares? What is the new earnings per share?Dickson, Inc., has a debt-equity ratio of 2.3. The firm's weighted average cost of capital is 11 percent and its pretax cost of debt is 8 percent. The tax rate is 23 percent. a. What is the company's cost of equity capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the company's unlevered cost of equity capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c. What would the company's weighted average cost of capital be if the company's debt- equity ratio were .80 and 1.30? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) a. Cost of equity b. Unlevered cost of equity C. WACC if debt-equity ratio = 0.80 WACC if debt-equity ratio = 1.30 % % % % do do do doa) Consider two firms L (Levered) & U (Unlevered) which are identical in all respect except for the capital structure. Both firms have EBIT of sh.900,000 ,a cost of equity of 10% and no corporate taxes. Firm L is partially using sh.4,000,000 of 7.5% interest debt while firm U is all equity financed. All the other traditional assumptions are applicable.Required:i) Using the Net income approach, compute the values of the two firms and WACC ii) Determine whether any of the two firms is overvalued giving an opportunity to make arbitrage profitiii) When would the arbitrage process cease?
- Firm U is an all-equity firm and has a market value of $100,000 and EBIT of $300,000. Firm L has identical EBIT, but it uses 40% debt in its capital structure. Firm L pays a total annual interest of $3000 on its debt. Both firms satisfy the MM assumptions. Taxes are absent. 1) Ryan is the holder of $9,000 worth of L's stock. What rate of return can he expect, assuming a dividend pay-out of 100%? 2) Using homemade leverage, show how Ryan could generate identical cash flows and rate of return by investing in Firm U.Blitz Industries has a debt-equity ratio of 1.7. Its WACC is 8.1 percent, and its cost of debt is 5.7 percent. The corporate tax rate is 23 percent. a. What is the company’s cost of equity capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the company’s unlevered cost of equity capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c-1. What would the cost of equity be if the debt-equity ratio were 2? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c-2. What would the cost of equity be if the debt-equity ratio were 1.0? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c-3. What would the cost of equity be if the debt-equity ratio were zero? (Do not round intermediate…Dickson, Incorporated, has a debt-equity ratio of 2.85. The firm's weighted average cost of capital is 10 percent and its pretax cost of debt is 6 percent. The tax rate is 24 percent. a. What is the company's cost of equity capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the company's unlevered cost of equity capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c. What would the company's weighted average cost of capital be if the company's debt- equity ratio were .25 and 1.85? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) a. Cost of equity b. Unlevered cost of equity c. WACC if debt-equity ratio = 0.25 c. WACC if debt-equity ratio = 1.85 % % % %