criticism. structure? Explain M-M Theory with their 5 The Holland Company expects perpetual earnings before interest and taxes (EBIT) of $4 6 million per year. The firm's after-tax, all-equity discount rate (ro) is 15%. Holland is subject to a corporate tax rate of 35%. The pretax cost of the firm's debt capital is 10% per annum, and the firm has $10 million of debt in its capital structure. i. ii. iii. Question: 7 What is Holland's value? What is Holland's cost of equity (rs)? What is Holland's weighted average cost of capital (Twacc)?

criticism. structure? Explain M-M Theory with their 5 The Holland Company expects perpetual earnings before interest and taxes (EBIT) of $4 6 million per year. The firm's after-tax, all-equity discount rate (ro) is 15%. Holland is subject to a corporate tax rate of 35%. The pretax cost of the firm's debt capital is 10% per annum, and the firm has $10 million of debt in its capital structure. i. ii. iii. Question: 7 What is Holland's value? What is Holland's cost of equity (rs)? What is Holland's weighted average cost of capital (Twacc)?

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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A company has £350 million of long-term debt in issue paying interest at a rate of 4%, and plans to maintain this level of debt going forward. The marginal tax rate faced by the firm is 25%. Assuming that the company is sufficiently profitable, the present value of the tax shield on interest expense is: a. £84.135m b. £3.365m c. £3.5md. £87.5m
Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd = 10% as long as it finances at its target capital structure, which calls for 25% debt and 75% common equity. Its last dividend (D 0) was $2.55, its expected constant growth rate is 3%, and its common stock sells for $ 22. EEC's tax rate is 25%. Two projects are available: Project A has a rate of return of 14%, and Project B's return is 8%. These two projects are equally risky and about as risky as the firm's existing assets. What is its cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places. % What is the WACC? Do not round intermediate calculations. Round your answer to two decimal places.
(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.)
3. Toran plc. is an all-equity financed firm and generates earnings of £200 per year. Its current required rate of return on equity is 10% per annum. It is planning to issue corporate debt at a rate of 8% to achieve a debt-equity ratio of 50%. Toran plc. Assume that debt and earnings are perpetuities. What happens to the firm value after the debt issuance? Assume there are perfect capital markets. 100 0 200 0 250 0 400 0 450 0
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.
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?
Your company is financed 20% with riskless debt with a yield of 6% and 80% with equity with a cost of 14%. The corporate tax rate is 30%. a. What is the company's WACC at its existing capital structure? b. What would be the new WACC if it changes to being 40% debt financed?
a firm has an asset base with a market value of 5.3 million. ITs debt is worth 2.5 million. if 0.2 million is paid in interest annually and the shareholders expect a 16% annual return, what is the weighted average cost of capital assuming no corporate taxes? what is the WACC if corporate taxes are 45%?

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