(b) Blues, Inc., is a multinational corporation (MNC) located in the United States.Blues would like to estimate its weighted average cost of capital. On average, yieldsof bonds issued by Blues is 9 percent. Currently, T-bill rates are 3 percent.Furthermore, Blues' stock has a beta of 1.5, and the return on the Wilshire 5000stock index is expected to be 10 percent. The targeted capital structure of Blues'consists of 30 percent debt and 60 percent equity. If Blues tax rate is 60 percent tax,calculate the weighted average cost of capital for Blues.(c) Messan Co. is a US firms borrows U.S. funds at an interest rate of 10 percentper year. The beta is 1.0. The long-term annualized risk-free rate in the UnitedStates is 6 percent. The stock market return in the United States is expected to be16 percent annually. Messan's target capital structure is 40 percent debt and 60percent equity. Messan Co. is subject to a 30 percent corporate tax rate. Estimatethe cost of capital for Messan Co.

Weighted average cost of capital is weighted considering the weight of bond and weight of equity of…

Blues, Inc., is a itional corporation (MNC) located in the lues would like to estimate its weighted average cost of capital. On ave f bonds issued by Blues is 9 percent. Currently, T-bill rates are urthermore, Blues' stock has a beta of 1.5, and the return on the W tock index is expected to be 10 percent. The targeted capital structu onsists of 30 percent debt and 60 percent equity. If Blues tax rate is 60 alculate the weighted average cost of capital for Blues. :) Messan Co. is a US firms borrows U.S. funds at an interest rate o er year. The beta is 1.0. The long-term annualized risk-free rate in tates is 6 percent. The stock market return in the United States is exp 6 percent annually. Messan's target capital structure is 40 percent ercent equity. Messan Co. is subject to a 30 percent corporate tax ra e cost of capital for Messan Co

Blues, Inc., is a itional corporation (MNC) located in the lues would like to estimate its weighted average cost of capital. On ave f bonds issued by Blues is 9 percent. Currently, T-bill rates are urthermore, Blues' stock has a beta of 1.5, and the return on the W tock index is expected to be 10 percent. The targeted capital structu onsists of 30 percent debt and 60 percent equity. If Blues tax rate is 60 alculate the weighted average cost of capital for Blues. :) Messan Co. is a US firms borrows U.S. funds at an interest rate o er year. The beta is 1.0. The long-term annualized risk-free rate in tates is 6 percent. The stock market return in the United States is exp 6 percent annually. Messan's target capital structure is 40 percent ercent equity. Messan Co. is subject to a 30 percent corporate tax ra e cost of capital for Messan Co

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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(Individual or component costs of capital) Compute the cost of capital for the firm for the following: a. A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 10.1 percent. Interest payments are $50.50 and are paid semiannually. The bonds have a current market value of $1,122 and will mature in 10 years. The firm's marginal tax rate is 34 percet. b. A new common stock issue that paid a $1.85 dividend last year. The firm's dividends are expected to continue to grow at 7.8 percent per year, forever. The price of the firm's common stock is now $27.25. c. A preferred stock that sells for $150, pays a dividend of 8.8 percent, and has a $100 par value. d. A bond selling to yield 11.8 percent where the firm's tax rate is 34 percent. a. The after-tax cost of debt is %. (Round to two decimal places.)
Optimist Company can sell common shares at $30 per share and can obtain debt funding at 8 percent. It has a marginal income tax rate of 25 percent. The yield on US Treasury securities is 3 percent. The market risk premium is 6.0 percent, and the firm's beta is 0.9. It has a targeted debt-to-equity ratio of 1:1. What is its after-tax cost of debt? Maximum number of characters (including HTML tags added by text editor): 32,000 Show Rich-Text Editor (and character count)
Percentages need to be entered in decimal format, for instance 3% would be entered as .03. Ezzell Enterprises has the following capital structure, which it considers to be optimal under present and forecasted conditions: Debt (long-term only) ratio - 45% Common equity - 55% Total liabilities and equity - 100% For the coming year, management expects after-tax earning of $2.5 million. Ezzell's past dividend policy of paying out 60% of earnings will continue. Present commitments from its bankers will allow Ezzell to borrow according to the following schedule: Loan Amount Interest Rate $1 to $500,000 9% on this increment of debt $500,001 to $900,000 11% on this increment of debt $900,001 and above 13% on this increment of debt The company's marginal tax rate is 40%, the current market price of its stock is $22 per share, its last dividend was $2.20 per share, and the expected growth rate is 5%. External equity (new common) can be sold at a flotation cost of 10%.…
FM Foods is evaluating its cost of capital. Use the following information provided on December 31, 2017, to estimate FM's after-tax cost of equity capital. Yield to maturity on long-term government bonds: 4.4% Yield to maturity on company long-term bonds: 6.3% Coupon rate on company long-term bonds: 7% Historical excess return on common stocks: 6.5% Company equity beta: 1.20 Stock price: $40.00 Number of shares outstanding (millions): 240 Book value of equity (millions): $5,240 Book value of interest-bearing debt (millions): $1,250 Tax rate: 35.0%
Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following weights: 40% long-term debt, 15% preferred stock, and 45% common stock equity (retained earnings, new common stock, or both). The firm's tax rate is 26%. Debt The firm can sell for $1005 a 13-year, $1,000-par-value bond paying annual interest at a 6.00% coupon rate. A flotation cost of 2.5% of the par value is required. Preferred stock 7.00% (annual dividend) preferred stock having a par value of $100 can be sold for $98. An additional fee of $5 per share must be paid to the underwriters. Common stock The firm's common stock is currently selling for $80 per share. The stock has paid a dividend that has gradually increased for many years, rising from $2.50 ten years ago to the $4.92 dividend payment, D0, that the company just recently made. If…
Orion is financed with 26% debt and the rest equity. Orion has an equity beta of 1.2, a debt beta of 0 and a marginal tax rate of 26%.If Orion issues debt to repurchase equity so that the new firm is now 52% debt, what will be its new equity beta? (Continue to assume the debt beta remains at 0.)
Crow Academy leadership wants to know its WACC given its current capital structure. The capital structure data is as follows. Equity: 2,843,200 shares outstanding, price $18.59, stock beta 0.96. Preferred stock: 675,000 shares outstanding, price $21.74, fixed dividend $0.75. Debt: 242,000 zero annual coupon bonds issued, price is 38% of par, 15 years to maturity. If the current market return is 14.28%, the risk-free rate is 3.18%, and the tax rate is 21%, what is the company's weighted average cost of capital (WACC)?
Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following weights: 35% long-term debt, 20% preferred stock, and 45% common stock equity (retained earnings, new common stock, or both). The firm's tax rate is 21%. Debt The firm can sell for $1030 a 13-year, $1,000-par-value bond paying annual interest at a 7.00% coupon rate. A flotation cost of 2% of the par value is required. Preferred stock 8.5% (annual dividend) preferred stock having a par value of $100 can be sold for $90. An additional fee of $4 per share must be paid to the underwriters. Common stock The firm's common stock is currently selling for $60 per share. The stock has paid a dividend that has gradually increased for many years, rising from $2.75 ten years ago to the $5.41 dividend payment, D0, that the company just recently made. If the…
Lynx Corp. currently has a WACC of 18 percent. If the cost of debt capital for the firm is 11 percent and the firm is currently financed with 50 percent debt, then what is the current cost of equity capital for the firm? Assume that the assumptions in Proposition 1 hold. (Round answer to 2 decimal places, e.g. 17.54%.)
Tiger Valley Inc recently had you estimate the cost of each of its capital sources. The firm typically finances with a combination of long-term debt, preferred stock, and common equity. The firm has a target of 40% debt financing and 15% preferred stock financing with the remainder of funds being raised from common equity. The after-tax cost of preferred stock has been estimated to be 4.4% while the after-tax cost of long-term debt has been estimated to be 5.2%. Due to its riskiness, the after-tax cost of equity has been estimated at a much higher rate of 12.8%. Estimate the firm’s WACC. Assume a tax rate of 40%.

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