CoffeeStop primarily sells coffee. It recently introduced a premium coffee-flavored liquor (BF Liquors). Suppose the firmfaces a tax rate of 35% and collects the following information. If it plans to finance 15% of the new liquor-focused divisionwith debt and the rest with equity, what WACC should it use for its liquor division? Assume a cost of debt of 4.8%, arisk-free rate of 2.1%, and a market risk premium of 6.3%.Beta% Equity% Debt5%CoffeeStopBF Liquors0.5995%0.2385%15%Note: Assume that the firm will always be able to utilize its full interest tax shield.The weighted average cost of capital is%. (Round to two decimal places.)

WACC = (Weight of equity * Cost of equity) +(Weight of debt * after tax cost of debt)

CoffeeStop primarily sells coffee. It recently introduced a premium coffee-flavored liquor (BF Liquors). Suppose the firm faces a tax rate of 35% and collects the following information. If it plans to finance 15% of the new liquor-focused division with debt and the rest with equity, what WNACC should it use for its liquor division? Assume a cost of debt of 4.8%, a risk-free rate of 2.1%, and a market risk premium of 6.3%. Beta % Equity % Debt 95% CoffeeStop BF Liquors 0.59 5% 0.23 85% 15% Note: Assume that the firm will always be able to utilize its full interest tax shield. The weighted average cost of capital is %. (Round to two decimal places.)

CoffeeStop primarily sells coffee. It recently introduced a premium coffee-flavored liquor (BF Liquors). Suppose the firm faces a tax rate of 35% and collects the following information. If it plans to finance 15% of the new liquor-focused division with debt and the rest with equity, what WNACC should it use for its liquor division? Assume a cost of debt of 4.8%, a risk-free rate of 2.1%, and a market risk premium of 6.3%. Beta % Equity % Debt 95% CoffeeStop BF Liquors 0.59 5% 0.23 85% 15% Note: Assume that the firm will always be able to utilize its full interest tax shield. The weighted average cost of capital is %. (Round to two decimal places.)

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

See similar textbooks

Similar questions

Wilde Software Development has a 10% unlevered cost of equity. Wilde forecasts the following interest expenses, which are expected to grow at a constant 4% rate after Year 3. Wilde's tax rate is 25%. Interest expenses Year 1=$70 , Year 2= $85, Year 3= $125. What is the horizon value of the interest tax shield? PLEASE Do not round intermediate calculations And please round the answer to the nearest cent. Please show me the steps I don't know what I'm doing wrong!
Speedy Delivery Systems can buy a piece of equipment that is anticipated to provide an 6 percent return and can be financed at 3 percent with debt. Later in the year, the firm turns down an opportunity to buy a new machine that would yield a 14 percent return but would cost 16 percent to finance through common equity. Assume debt and common equity each represent 50 percent of the firm's capital structure. a. Compute the weighted average cost of capital. Note: Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Weighted average cost of capital b. Which project(s) should be accepted? O New machine. O Piece of equipment. %
Hallmark, the greeting card company, is considering going online. It is anticipated that it will cost the firm RM 1 billion to do so and that the firm will be able to use its current debt capacity to borrow 20% of this investment, at an after-tax cost of 4.5%. Hallmark has a beta of 1.1. Online retailers have a beta of 1.50 and do not carry debt. If the riskless rate is 6% and the market risk premium is 5.5% estimate the cost of capital for the online investment.
Zerox Inc. is contemplating acquiring its peer firm-Nova Corporation since Zerox believes that Nova is poorly managed. The most recent information about Nova is as follows: FCFF = 200 million, Market value of equity=$2,000 million, Outstanding debt=200 million, Before-tax cost of debt=5%, Tax rate=30%, Beta=1. Nova is already in steady state and is expected to grow 6% a year in the long term. The treasury bond rate is 3%, and the market risk premium is 6%. Zerox believes that the current financial leverage of Nova is not optimal and intends to increase the debt ratio of Nova to 20% of total capital from current level after the acquisition, which will incur a cost of debt of 5.5%. How much is the value of control worth in this acquisition plan?rnrnGroup of answer choicesrnrna). $203.27 millionrnb). $2,526.32 millionrnc). $2,152.28 millionrnd). $756.50 millionrne). $193.27 million
Stevensons bakeries and all equity firm that has a projected perpetual EBIT of $144,000 per year. The cost of equity is 10.5% and the tax rate is 21%. Assume there's no depreciation, no capital spending and no change in networking capital. The firm can borrow perpetual debt at 5.8%. Currently, the firm is considering converting to a debt equity ratio of .54. What is the firms levered value? MM assumptions hold.
A company has a WACC of 11%. It is in the business of selling fast food in North America. Now it has expansion plans to open up fast food restaurants in China. It expects to earn a return on this investment of 12%. Which of the following statements is true? A.It should for sure ahead for sure with the expansion, since the return is higher than the cost of capital. B.It should decrease its cost of capital to a higher percentage to reflect its higher risk to decide whether or not to go forth with this investment in China. C.It should convert its WACC to a Chinese cost of capital by multiplying the WACC times an exchange rate. D. It should increase its cost of capital to a higher percentage to reflect its higher risk to decide whether or not to go forth with this investment in China. E.The company should never consider a project of higher than normal risk.
CoffeeStop primarily sells coffee. It recently introduced a premium coffee-flavoured liquor. Suppose the firm faces a tax rate of 35% and collects the information in the table below. If the company plans to finance 14% of the new liquor-focused division with debt and the rest with equity, what WACC should it use for its liquor division? Assume a cost of debt of 4.9%, a risk-free rate of 4.2%, an equity beta of 0.28, and a market risk premium of 5.9%. Beta 0.58 0.28 % Equity 95% 86% % Debt 5% 14% CoffeeStop Brown-Forman Liquors Note: Assume that the firm will always be able to utilize its full interest tax shield. CoffeStop should use a WAAC rate of % to evaluate the Brown-Forman Liquor division. (Round to two decimal places.)
Costly Corporation is considering using equity financing. Currently, the firm's stock is selling for $31.00 per share. The firm's dividend (D0) is $3.00 with constant annual growth rate of 5.0%. If the firm issues new stock, the flotation costs would equal 10.0 percent of the stock's market value. The firm's marginal tax rate is 40%. What is the firm's cost of external equity?
An unlevered firm has a value of $900 million. An otherwise identical but levered firm has $180 million in debt at a 4% interest rate, which is its pre-tax cost of debt. Its unlevered cost of equity is 12%. No growth is expected. Assuming the federal-plus-state corporate tax rate is 25%, use the MM model with corporate taxes to determine the value of the levered firm. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answer to the nearest whole number. S million
Roxy Broadcasting, Inc. is currently a low-levered firm with a debt-to-equity ratio of 2/7. The company wants to increase its leverage to 7/2 for debt to equity. If the current return on assets is 10% and the cost of debt is 8%, what are the current and the new costs of equity if Roxy operates in a world of no taxes?
Sweetness Inc. produces a line of chocolate candies and has an optimal capital structure that is 50% debt and 50% equity. Sweetness has a beta of 1.2 and is considering expanding into the appetizer business. Sweetness’ primary competition in the appetizer business has a beta of 1.5 and a 40%/60% debt/equity mix. If the risk-free rate is 7%, the market risk premium is 8.5%, and the marginal tax rate is 40%, what is the cost of the equity-financed portion of Sweetness’ new investment
Globex Corp. is an all-equity firm, and it has a beta of 1. It is considering changing its capital structure to 60% equity and 40% debt. The firm's cost of debt will be 6%, and it will face a tax rate of 25%. What will Globex Corp.'s beta be if it decides to make this change in its capital structure? Now consider the case of another company: US Robotics Inc. has a current capital structure of 30% debt and 70% equity. Its curre is 25%. It currently has a levered beta of 1.15. The risk-free rate is 3.5%, and the risk 1.65 1.58 1.80 1.50 e-tax cost of debt is 6%, and its tax rate m on the market is 7.5%. US Robotics

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS