Assets Liabilities and Shareholders' Equity Asseta (book value) $80 Debt $30 Equity $50 $80 $80 Unfortunately, the company has fallen on hard times. The 5 million shares are trading for only $4 apiece, and the market value of its debt securities is 404 below the face (book) value. Suppose shareholders now demand a 204 expected rate of return. The bonds are now yielding 144. a. What is the firm's weighted-average cost of capital if the firm's tax rate is 214? b.If the company considers a normal project whose risk is about the same as the company's risk with an internal rate of return of 134, should it accept the project? Why or why not?
Assets Liabilities and Shareholders' Equity Asseta (book value) $80 Debt $30 Equity $50 $80 $80 Unfortunately, the company has fallen on hard times. The 5 million shares are trading for only $4 apiece, and the market value of its debt securities is 404 below the face (book) value. Suppose shareholders now demand a 204 expected rate of return. The bonds are now yielding 144. a. What is the firm's weighted-average cost of capital if the firm's tax rate is 214? b.If the company considers a normal project whose risk is about the same as the company's risk with an internal rate of return of 134, should it accept the project? Why or why not?
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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Do not use excel please
Transcribed Image Text:Type 1C: Here is a book balance sheet for Ink and Press Co.
Figures are in millions.
Assets
Liabilities and Shareholders' Equity
Assets (book value)
$80
Debt
$30
Equity
$50
$80
$80
Unfortunately, the company has fallen on hard times.
The 5 million shares are trading for only $4 apiece, and the market value of its debt securities is 40% below
the face (book) value.
Suppose shareholders now demand a 20% expected rate of return.
The bonds are now yielding 14%.
a.What is the firm' weighted-average cost of capital if the firm's tax rate is 21%?
b.If the company considers a normal project whose risk is about the same as the company's risk with an internal rate of return of 13%, should it accept the project?
Why or why not?
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