Based on your financial statement analysis on Gold Limited (“Gold”), you noted as it has a target debt-to-equity structure of 0.75. Gold’s shares currently trade at $6.60. Dividends paid last year were $0.50 and this is expected to grow at 3% per year to perpetuity. Its pre-tax cost of debt is 8%. Market research also revealed as follows: • Inflation rate = 2% • Yield on government securities = 4% • Market risk premium = 6% • Tax rate = 20% Solve for Gold’s weighted average cost of capital.

Based on your financial statement analysis on Gold Limited (“Gold”), you noted as it has a target debt-to-equity structure of 0.75. Gold’s shares currently trade at $6.60. Dividends paid last year were $0.50 and this is expected to grow at 3% per year to perpetuity. Its pre-tax cost of debt is 8%. Market research also revealed as follows: • Inflation rate = 2% • Yield on government securities = 4% • Market risk premium = 6% • Tax rate = 20% Solve for Gold’s weighted average cost of capital.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter15: Dividend Policy

Section: Chapter Questions

Problem 15P

See similar textbooks

Similar questions

Now (use the following information) suppose that: The cost of debt (ra) is 3.875% (before tax), • Flotation costs (F) = 7% of issue price, The debt is trading at $1,025.00, There are 7,250 bonds outstanding, • The tax rate is .35, The LAST dividend paid yesterday (Do) = $4.56, The expected constant growth rate (g) = 2.75%, Beta = 1.55, TRF = 1.14%, = 4.5%, (market risk premium) The firm has 250,000 shares of common stock outstanding, Common stock shares are trading at $47.32/share (Po). RPm Given the above information, what is the Market value of the firm's debt? $. Given the above information, what is the Market value of the firm's equity? $. Now calculate the weight of debt for the firm (Wa). You will use this to calculate the WACC. Now calculate the weight of equity for the firm (Wee). You will use this to calculate the WACC. What is the cost of existing common equity (retained earnings)? (Briefly describe your approach/method as well as your answer) What is the cost of NEW common…
Now (use the following information) suppose that: The cost of debt (ra) is 3.875% (before tax), • Flotation costs (F) = 7% of issue price, The debt is trading at $1,025.00, There are 7,250 bonds outstanding, • The tax rate is .35, The LAST dividend paid yesterday (Do) = $4.56, The expected constant growth rate (g) = 2.75%, Beta = 1.55, TRF = 1.14%, RPm = 4.5%, (market risk premium) The firm has 250,000 shares of common stock outstanding, Common stock shares are trading at $47.32/share (Po). Now calculate the weight of equity for the firm (Wee). You will use this to calculate the WACC. What is the cost of existing common equity (retained earnings)? (Briefly describe your approach/method as well as your answer) What is the cost of NEW common equity? (Briefly describe your approach/method as well as your answer) What is the firm's WACC using existing common equity? (Briefly describe your approach/method as well as your answer) Market Value of Debt - $7,431,250 Market Value of Equity -…
Whirlpool manufactures and sells home appliances under various brand names. IBM develops and manufactures computer hardware and offers related technology services. Target operates a chain of general merchandise discount retail stores. The data in the following table apply to these companies (dollar amounts in millions). For each firm, assume that the market value of the debt equals its book value. REQUIRED a. Assume that the intermediate-term yields on U.S. government Treasury securities are 3.5%. Assume that the market risk premium is 5.0%. Compute the cost of equity capital for each of the three companies. b. Compute the weighted-average cost of capital for each of the three companies. c. Compute the unlevered market (asset) beta for each of the three companies. d. Assume that each company is a candidate for a potential leveraged buyout. The buyers intend to implement a capital structure that has 75% debt (with a pretax borrowing cost of 8.0%) and 25% common equity. Project the weighted-average cost of capital for each company based on the new capital structure. To what extent do these revised weighted-average costs of capital differ from those computed in Requirement b?
Suppose the Schoof Company has this book value balance sheet: The notes payable are to banks, and the interest rate on this debt is 10%, the same as the rate on new bank loans. These bank loans are not used for seasonal financing but instead are part of the companys permanent capital structure. The long-term debt consists of 30,000 bonds, each with a par value of 1,000, an annual coupon interest rate of 6%, and a 20-year maturity. The going rate of interest on new long-term debt, rd, is 10%, and this is the present yield to maturity on the bonds. The common stock sells at a price of 60 per share. Calculate the firms market value capital structure.
Give typing answer with explanation and conclusion Jenkins, Inc., has equity with a market value of $23.5 million and debt with a market value of $11.75 million. The cost of debt is 8 percent per year. Treasury bills that mature in one year yield 4 percent per year, and the expected return on the market portfolio over the next year is 10 percent. The beta of the company’s equity is 1.2. The firm pays no taxes. a. What is the company’s debt-equity ratio? (Do not round) a. Debt-equity ratio b. weighted average cost of capital c. cost of capital
Stevenson's Bakery is an all-equity firm that has projected perpetual EBIT of $183,000 per year. The cost of equity is 13.1 percent and the tax rate is 21 percent. The firm can borrow perpetual debt at 6.3 percent. Currently, the firm is considering converting to a debt–equity ratio of .93. What is the firm's levered value? MM assumptions hold. A. $829,786 B. $1,215,262 C. $1,155,579 D. $997,511 E. $921,985
Akita is trying to estimate the value of its business given the following information: Government securities generates a yield of 4.5% Akita, being a relatively mature business was able to determine its credit spread to be at 2.5% for a 3-year maturity instrument and increases by 0.5% for each additional year to maturity Current debt instruments issued by Akita is only a Php1,000,000 debt instrument with a 5 year tenor issued last year carrying a 7% coupon Other than the debt instrument issued, Akita also paid back shareholders at a Php8.00 dividend per share this year based on its Php10.0 earnings per share Book value per share of equity instruments is currently at Php15.00 1. How much is the expected cost of equity assuming that the current price per share is Php75.00? 2. How much is the market value Akita's sole debt instrument? 3. How much is the WACC for Akita assuming that the current price per share is Php75.00 and tax rate at 30%?
help please
Quantitative Problem: Barton Industries estimates its cost of common equity by using three approaches: the CAPM, the bond-yield-plus-risk-premium approach, and the DCF model. Barton expects next year's annual dividend, D1, to be $1.90 and it expects dividends to grow at a constant rate g = 5.0%. The firm's current common stock price, Po, is $25.00. The current risk-free rate, rRE, = 4.4%; the market risk premium, RPM, = 5.9%, and the firm's stock has a current beta, b, = 1.30. Assume that the firm's cost of debt, rd, is 10.23%. The firm uses a 2.9% risk premium when arriving at a ballpark estimate of its cost of equity using the bond-yield-plus-risk-premium approach. What is the firm's cost of equity using each of these three approaches? Round your answers to two decimal places. CAPM cost of equity: % Bond yield plus risk premium: % DCF cost of equity: % What is your best estimate of the firm's cost of equity? -Select-
Assume that you are on the financial staff of Vanderheiden Inc., and you have collected the following data: The yield on the company's outstanding bonds is 7.75%, its tax rate is 40%, the next expected dividend is S0.65 a share, the dividend is expected to grow at a constant rate of 6.00% a year, the price of the stock is $17.00 per share, the flotation cost for selling new shares is F 10%, and the target capital structure is 45% debt and 55% common equity. What is the firm's WACC, assuming it must issue new stock to finance its capital budget? Please provide each step and why, and how to get to the next step
You are analysis Sasol stock and you have gathered the information in the table below. If the net debt of the firm increased by R20 million, what is the approximate FCFE? FCFF Interest after tax Tax rate FCFE growth Cost of equity R198m R15m 35% 3% 14% R1,950 R2,497 R203 R188.25 R208.25
Quantitative Problem: Barton Industries estimates its cost of common equity by using three approaches: the CAPM, the bond-yield-plus-risk-premium approach, and the DCF model. Barton expects next year's annual dividend, D1, to be $2.20 and it expects dividends to grow at a constant rate g = 5.9%. The firm's current common stock price, P0, is $29.00. The current risk-free rate, rRF, = 4.7%; the market risk premium, RPM, = 6%, and the firm's stock has a current beta, b, = 1.2. Assume that the firm's cost of debt, rd, is 8.69%. The firm uses a 4% risk premium when arriving at a ballpark estimate of its cost of equity using the bond-yield-plus-risk-premium approach. What is the firm's cost of equity using each of these three approaches? Round your answers to two decimal places. CAPM cost of equity: % Bond yield plus risk premium: % DCF cost of equity: % What is your best estimate of the firm's cost of equity?-Select- (The best estimate is the highest percentage of the three…