Bombardier Inc has common stock trading at a price of $15, and a market capitalization of $8 billion. The firm also has preferred stock worth a total of $2 billion, currently trading at $23 per share and paying a dividend of $2.75 per share. The firm's beta is 0.93, the risk-free rate is3.2%, and the market risk premium is 7%. The firm has $12 billion of debt with a yield to maturity of 5%. If the firm's tax rate is 20%, what is Bombardier's WACC?O A. 7.3%OB. 8.56%O C. 4.12%O D. 7.57%OE. 6.8%

The weighted average cost of capital is the cost of capital after consideration of weights of…

Answered: Bombardier Inc has common stock trading…

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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AllCity, Inc., is financed 39% with debt, 9% with preferred stock, and 52% with common stock. Its pretax cost of debt is 5.7%, its preferred stock pays an annual dividend of $2.49 and is priced at $27. It has an equity beta of 1.19. Assume the risk-free rate is 1.6%, the market risk premium is 7.2% and AllCity's tax rate is 25%. What is its after-tax WACC? Note: Assume that the firm will always be able to utilize its full interest tax shield.
Spam Corporation is financed entirely by common stock and has a beta of 1.60. The firm is expected to generate a level, perpetual stream of earnings and dividends. The stock has a price-earnings ratio of 7.60 and a cost of equity of 13.16%. The company's stock is selling for $28. Now the firm decides to repurchase half of its shares and substitute an equal value of debt. The debt is risk-free, with an interest rate of 6%. The company is exempt from corporate income taxes. Assume MM are correct. a. Calculate the cost of equity after the refinancing. Note: Enter your answer as a percent rounded to 2 decimal places. b. Calculate the overall cost of capital (WACC) after the refinancing. Note: Enter your answer as a percent rounded to 2 decimal places. c. Calculate the price-earnings ratio after the refinancing. Note: Do not round intermediate calculations. Round your answer to 2 decimal places. d. Calculate the stock price after the refinancing. e. Calculate the stock's beta after the…
AllCity, Inc., is financed 37% with debt, 7% with preferred stock, and 56% with common stock. Its pretax cost of debt is 6.2%, its preferred stock pays an annual dividend of $2.52 and is priced at $33. It has an equity beta of 1.13. Assume the risk-free rate is 2.1%, the market risk premium is 6.6% and AllCity's tax rate is 25%. What is its after-tax WACC? Note: Assume that the firm will always be able to utilize its full interest tax shield. ..... The WACC is %. (Round to two decimal places.)
Rollins Corporation is estimating its WACC. Its target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Rollins' beta is 1.2 , the risk-free rate is 5 percent, and the market risk premium is 5 percent. Rollins is a constant-growth firm which just paid a dividend of $2.00, sells for $32 per share, and has a growth rate of 5 percent. The firm's policy is to use a risk premium of 5 percentage points when using the bond-yield-plus-risk-premium method to find rs. The firm's marginal tax rate is 32 percent.What is Rollins cost of equity when using the DCF approach? Express your answer in percentage (without the % sign) and round it to two decimal places
TT Industries is trading for $20 per share and has 25 million shares outstanding. TT Industries has a debt-equity ratio of 0.4 and its debt is zero coupon debt with a ten-year maturity and a yield to maturity of 8%. Which of the following best describes TT's debt using a put option? A) Short $200 million in risk-free debt and Long a put option on the firm's assets with a $200 strike price B) Long $200 million in risk-free debt and Short a put option on the firm's assets with a $700 strike price C) Long $200 million in risk-free debt and Short a put option on the firm's assets with a $200 strike price D) Short $200 million in risk-free debt and Long a put option on the firm's assets with a $700 strike price
A firm's stock has a market capitalization of 520 million and an equity beta of 1.05. Bonds issued by the firm have a yield rate of 8.1%. Bonds with a similar debt rating has a default rate of 3.1% and a loss rate of 55%. The total market value of the firm's bonds is 280 million. The risk free rate is 1.9% and the market risk premium is 7.5%. The volatility of the market portfolio is 23%. Suppose that the CAPM assumptions hold. Calculate the covariance between the return of the firm's assets and the return of the market portfolio. O 0.0472 0.0434 0.0548 0.0585 O 0.0510
Company Zero is a non-listed private company with total equity of P10 million and debt of P4.5 million. The tax rate is 30%, risk-free rate is 6%. Company One is a publicly listed company which is in the same industry, product line and risk profile as Company Zero. It has a beta of 1.5, equity of P15 million and total debt of P6 million. Tax rate is 35%. The expected return of on a market portfolio is 12% and the risk-free return is 8%. a. Compute the beta for Company Zero. b. Compute the risk premium and the required return for Company One market portfolio.
Northern Wood Products is an all-equity firm with 20,700 shares of stock outstanding and a total market value of $365,000. Based on its current capital structure, the firm is expected to have earnings before interest and taxes of $32,500 if the economy is normal, $19,200 if the economy is in a recession, and $45,800 if the economy booms. Ignore taxes. Management is considering issuing $91,900 of debt with an interest rate of 7 percent. If the firm issues the debt, the proceeds will be used to repurchase stock. What will the earnings per share be if the debt is issued and the economy is in a recession?
XYZ currently has common stock trading at $40 per share. XYZ just paid a dividend of $2.00 per share, which is expected to grow at a constant rate of 5%. XYZ's beta is 1.5, the risk-free rate is 2%, and the market return is expected to be 8%. The pre-tax yield on XYZ's bonds is 7%. XYZ's finance department believes that new stock would require a premium of 5% over their own bond yield. Flotation cost for issuing new stock is 10%. Compute the cost of retained earnings using the bond yield plus risk premium approach (show your answer in percent, and to 2 decimal places. Example: 9.62%). Question 4 options:
Consider Rhye, amid-size pharmaceutical company. Rhye’s equity has a book value of $2.8 billion and a market value of $19.4 billion. Rhye’s debt, on the other hand, has a book value of $500 million and a market value of $600 million; the debt’s annual interest rate and yield to maturity are 6% and 5%, respectively. Currently, Rhye has a beta of 1.2 and faces a corporate tax rate of 35%. Also currently, the yield to maturity on 10-year U.S. Treasury Notes is 2.5%. The market risk premium remains around its historical average of 5.5%. so, what is Rhye's debt ratio, equity ratio, and WACC? Help me with this. TQ
Spartan Machinery stock trades at $60 per share with a beta of 1.5, an estimated market return of 12%, and a risk free rate of 5%. There are 20 million shares outstanding. The company has bonds with a face value $1 billion outstanding and a market value of $980 million. The coupon rate is 9% (semiannual coupons) and there are 10 years to maturity. The company has a tax rate of 38%. What is the WACC?
Mitsu Corporation has 100,000 shares of common stock outstanding. The stock currently sells for $50 per share and has a beta of 1.8. The firm has $4 million debt outstanding. The cost of debt before tax is 6.5%. The market risk premium is 7%. T- bills are yielding 4%. Tax rate is 35%. What is the weighted average cost of capital (WACC) of the firm? A) 9.07% O B) 11.10% C) 9.93% D) 11.50% E) 10.36%

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