DuraMax Inc. manufactures car radios and reported $ 75 million in operating incomelast year on revenues of $ 1 billion last year. The firm is all equity funded and you havecomputed a beta for the firm of 0.80. You have estimated the optimal debt ratio for the firm to be40% debt, and you expect the firm to have S 20 million in interest expenses at that debt ratio.Using the interest coverage ratio table at the bottom of this page, estimate the cost of capital forDuraMax at the optimal debt ratio. The riskfree rate is 4%, the tax rate is 40% and the equitymarket risk premium is 4.82%.Interest CoverageTypical defaultspread0.35%RatioRatingAAA> 12.59.50 -12.50AA0.50%7.50 - 9.506.00 – 7.504.50 - 6.00A+0.70%0.85%1.00%BBB1.50%2.00%4.00 – 4.503.50 – 4.00BB+

Computation of the ICR (interest coverage ratio) is as follows: The default spread at 3.75 ICR is…

Answered: DuraMax Inc. manufactures car radios…

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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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!
Caddy manufacturing has a target debt equity ratio of .45. Its cost of equity is 10.3%, and its pre- tax cost of debt is 6.4%. If the tax rate is 21%, what is the company's WACC ? Pls type in computer! Thanks
A company is considering its optimal capital structure. The firm currently has 1 million shares outstanding at $ 20 per share (tax rate = 40%) and a debt balance of $5 million. Currently, its (levered) beta is 1.5 and its ERP is 5.5%. The current risk-free rate is 5%. Your research indicate the following ratings and pre-tax cost of debt across the different debt ratios: D/(D+E) Rating Pre-tax cost of debt 0% AAA 10% 10% AA 10.5% 20% A 11% 30% BBB 12% 40% BB 13% 50% B 14% 60% CCC 16% 70% CC 18% 80% C 20% 90% D 25% a. Using the optimal WACC approach, what is the firm's optimal debt ratio? b. Calculate the company's unlevered value, assuming that the probability of default is 5% and the company loses 30% of its value in the event of a default.
A firm's financial managers are evaluating two potential investments with a cost of $10,000 each. They forecast returns of $3,000 per year for 5 years for Investment A and $4,000 per year for 5 years for Investment B. The returns are more uncertain for B than for A. Which of the following is true? Investment A is better than B according to shareholder wealth maximization criterion. Investment B is better than A according to shareholder wealth maximization criterion. Investment A is better than B according to the profit maximization criterion. Investment B is better than A according to the profit maximization criterion.
YiYu Manufacturer wishes to maintain a growth rate of 6 percent a year, a debt-equity ratio of 0.45, and a dividend payout ratio of 30 percent. The ratio of total assets to sales is constant at 1.25. Calculate the profit margin the firm must achieve.
Situational Software Co. (SSC) is trying to establish its optimal capital structure. Its current capital structure consists of 20% debt and 80% equity; however, the CEO believes that the firm should use more debt. The risk-free rate, rRF, is 4%; the market risk premium, RPM, is 7%; and the firm's tax rate is 25%. Currently, SSC's cost of equity is 14%, which is determined by the CAPM. What would be SSC's estimated cost of equity if it changed its capital structure to 50% debt and 50% equity? Do not round intermediate calculations. Round your answer to two decimal places.
hartman motors has $32 million in assets, which were financed with $8 million of debt and $24 million in equity. Hartman's beta is currently 1.6, and its tax rate is 30%. Use the Hamada equation to find Hartman's unlevered beta, bu. Do not round intermediate calculations. Round your answer to two decimal places.
Suppose you are estimating the WACC for Columbus Inc. It has the following data from its balance sheet: total debt = $290 million; total equity=$60 million. It has 20 million shares outstanding, and its stock is trading at $32 per share. Your analysis shows that the company's current borrowing rate is 7%, and that the cost of equity is 13%. If the company marginal tax rate is 30%, what is its WACC?
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You are going to value Lauryn's Doll Co. using the FCF model. After consulting various sources, you find that Lauryn's has a reported equity beta of 1.7, a debt-to-equity ratio of 0.7, and a tax rate of 20 percent. Based on this information, what is the asset beta for Lauryn's? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Lauryn's asset beta

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