Bulldogs Inc., a 100% equity finance entity, is considering the formation of a new division that will increase the assets of the firm by 50%. Bulldogs Inc. currently has a required rate of return of 18%, Treasury bonds yield 7%, and the market risk premium is 5%. What is the maximum beta coefficient the new division could have, if Bulldogs Inc. wants to reduce its required rate of return to 16%? 1.8 1.0 2.3 1.7
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- Potter Inc. is trying to estimate its optimal capital structure. Right now, Potter Inc. has a capital structure that consists of 20 percent debt and 80 percent equity. The risk-free rate is 6 percent, and the market risk premium is 5 percent. Currently the company’s cost of equity, which is based on the CAPM, is 12 percent and its tax rate is 40 percent.What is the new levered beta given the new capital structure? a1.67 b1.039 c1.409 d1.24 What would be Potter Inc.’s estimated cost of equity if it were to change its capital structure to 50 percent debt and 50? a14.35% b30.00% c14.72% d15.60%Globo-Chem Co. is an all-equity firm, and it has a beta of 1. It is considering changing its capital structure to 65% equity and 35% debt. The firm's cost of debt will be 10%, and it will face a tax rate of 25%. What will Globo-Chem Co.'s beta be if it decides to make this change in its capital structure? 1.82 Now consider the case of another company: US Robotics Inc. has a current capital structure of 30% debt and 70% equity. Its current before-tax cost of debt is 10%, and its tax rate is 25%. It currently has a levered beta of 1.15. The risk-free rate is 2.5%, and the risk premium on the market is 7.5%. US Robotics Inc. is considering changing its capital structure to 60% debt and 40% equity. Increasing the firm's level of debt will cause its before-tax cost of debt to increase to 12%. First, solve for US Robotics Inc.'s unlevered beta. Use US Robotics Inc.'s unlevered beta to solve for the firm's levered beta with the new capital structure. Use US Robotics Inc.'s levered beta under…9. Determining the optimal capital structure Aa Aa Understanding the optimal capital structure Review this situation: Universal Exports Inc. is trying to identify its optimal capital structure. Universal Exports Inc. has gathered the following financial information to help with the analysis. Debt Ratio Equity Ratio rd rs WACC 30% 70% 7.00% 10.50% 8.61% 40% 60% 7.20% 10.80% 8.21% 50% 50% 7.70% 11.40% 8.01% 60% 40% 8.90% 12.20% 8.08% 70% 30% 10.30% 13.50% 8.38% Which capital structure shown in the preceding table is Universal Exports Inc.'s optimal capital structure? Debt ratio = 40%; equity ratio = 60% Debt ratio 50%; equity ratio = 50% Debt ratio = 70%; equity ratio 30% Debt ratio = 30%; equity ratio = 70% Debt ratio = 60%; equity ratio = 40% Consider this case: Globo-Chem Co. is an all-equity firm, and it has a beta of 1. It is considering changing its capital structure to 65% equity and 35% debt. The firm's cost of debt will be 8%, and it will face a tax rate of 40%.
- Want a complete detailed answer with formulas and steps Cyclone Software Co. is trying to establish its optimal capital structure. Its current capital structure consists of 25% debt and 75% equity; however, the CEO believes that the firm should use more debt. The risk-free rate, Rf, is 5%; the market risk premium, RPM, is 6%; and the firm’s tax rate is 40%. Currently, Cyclone’s cost of equity is 14%, which is determined by the CAPM. What would be Cyclone’s estimated cost of equity if it changed its capital structure to 50% debt and 50% equity? based on cost of equity estimations, Should the firm change its capital structure?1. Arizona Rock, an all-equity firm, currently has a beta of 1.25. The risk-free rate, kRF, is 7 percent and kM is 14 percent. Suppose the firm sells 10 percent of its assets with beta equal to 1.25 and purchases the same proportion of new assets with a beta of 1.1. What will be the firm’s new overall required rate of return, and what rate of return must the new assets produce in order to leave the stock price unchanged? a. 15.645%; 15.645% b. 15.750%; 15.645% c. 14.750%; 15.750% d. 15.645%; 14.700% e. 15.750%; 14.700% 2. Dry Seal plans to issue bonds to expand operations. The bonds will have a par value of P1,000, a 10-year maturity, and a coupon interest rate of 9%, paid semiannually. Current market conditions are such that the bonds will be sold to net P937.79. What is the yield-to-maturity of these bonds? a. 10% b. 9% c. 11% d. 8% 3. You have just purchased a 15-year, P1,000 par value bond. The coupon rate on this bond is nine percent (9%) annually, with…Suppose Alcatel-Lucent has an equity cost of capital of 10.3%, market capitalization of $9.36 billion, and an enterprise value of $13 billion. Assume that Alcatel-Lucent's debt cost of capital is 7.3%, its marginal tax rate is 34%, the WACC is 8.7650%, and it maintains a constant debt-equity ratio. The firm has a project with average risk. The expected free cash flow, levered value, and debt capacity are as follows: Thus, the NPV of the project calculated using the WACC method is $182.73 million - $100 million = $82.73 million. a. What is Alcatel-Lucent's unlevered cost of capital? b. What is the unlevered value of the project? c. What are the interest tax shields from the project? What is their present value? d. Show that the APV of Alcatel-Lucent's project matches the value computed using the WACC method. a. What is Alcatel-Lucent's unlevered cost of capital? Alcatel-Lucent's unlevered cost of capital is%. (Round to four decimal places.) Data table (Click on the following icon in…
- ix Browne, Incorporated estimates that its break point (BPRE) is $12 million, and its WACC is 9.8 percent if common equity comes from retained earnings. However, if the company issues new stock to raise new common equity, it estimates that its WACC will rise to 10.8 percent. The company is considering the following equal-life investment projects: Project A B с D Size $4 million 6 million 3 million 5 million What is the firm's optimal capital budget? a. $10 million b. $13 million c. $15 million d. $18 million e. None of the above IRR 11.4% 11.9 10.1 10.3The FMS Corporation needs to raise investment money amounting to $40 million in new equity. The firm’s market risk is βM = 1.4, which means the firm is believed to be riskier than the market average. The risk free interest rate is 2.8% and the average market return is 9% per year. What is the cost of equity for the $40 million?Nalcoa Corp. is financing a project that is in the same industry as its current portfolio of projects. If Nalcoa has a beta of 1.2, the expected return on the market is 15%, and the expected market risk premium is 8%, then what is the weighted average cost of capital for Nalcoa if it plans to continue to be an all equity financed firm? (Answer in decimal form)
- Simon Software Co. is trying to estimate its optimal capital structure. Right now, Simon has a capital structure that consists of 20 percent debt and 80 percent equity, based on market values. (Its D/S ratio is 0.25.) The risk-free rate is 6 percent and the market risk premium, rM - rRF, is 5 percent. Currently the company's cost of equity, which is based on the CAPM, is 12 percent and its tax rate is 40 percent. Find the new levered beta given the new capital structure (if it were to change its capital structure to 50 percent debt and 50 percent equity) using the Hamada equation. O 1.67 O 0.81 O 1.00 O 1.22 O 1.45I believe the answer is b but I would appreciate this solved and worked out.Hardmon Enterprises is currently an all-equity firm with an expected return of 18%. It is considering a leveraged recapitalization in which it would borrow and repurchase existing shares. (Assume perfect capital markets.) a. Suppose Hardmon borrows to the point that its debt-equity ratio is 0.50. With this amount of debt, the debt cost of capital is 5%. What will the expected return of equity be after this transaction? b. Suppose instead Hardmon borrows to the point that its debt-equity ratio is 1.50. With this amount of debt, Hardmon's debt will be much riskier. As a result, the debt cost of capital will be 7%. What will the expected return of equity be in this case? c. A senior manager argues that it is in the best interest of the shareholders to choose the capital structure that leads to the highest expected return for the stock. How would you respond to this argument? a. Suppose Hardmon borrows to the point that its debt-equity ratio is 0.50. With this amount of debt, the debt cost…