Equity Information: -50 million shares -$80 per share -Beta = 1.15 -Market risk premium = 9% -Risk-free rate = 5% Debt Information: -$1 billion in outstanding debt (face value) -Current price = $1100 -Coupon rate = 9%, semiannual coupons -15 years to maturity - Tax rate = 40% What is the WACC? a. 11.60% approximately O b. 21.57% approximately C. 13.73% approximately. O d. 13.06% approximately e. 10.03% approximately Gordon Growth Company is expected to pay a dividend of $4 next period and dividends are expected to grow at 6% per year. The required return is 16%. What is the expected stock price in year 4? O a. $5.50 O b. No option is correct ○ c. $50.05 O d. $5.05 O e. $55 What is the current yield on a 10% coupon bond which is currently selling for $1,150? O a. 9.4% O b. 7.8% O c. 8.7% ○ d. 10% O e. 80.7%

Equity Information: -50 million shares -$80 per share -Beta = 1.15 -Market risk premium = 9% -Risk-free rate = 5% Debt Information: -$1 billion in outstanding debt (face value) -Current price = $1100 -Coupon rate = 9%, semiannual coupons -15 years to maturity - Tax rate = 40% What is the WACC? a. 11.60% approximately O b. 21.57% approximately C. 13.73% approximately. O d. 13.06% approximately e. 10.03% approximately Gordon Growth Company is expected to pay a dividend of $4 next period and dividends are expected to grow at 6% per year. The required return is 16%. What is the expected stock price in year 4? O a. $5.50 O b. No option is correct ○ c. $50.05 O d. $5.05 O e. $55 What is the current yield on a 10% coupon bond which is currently selling for $1,150? O a. 9.4% O b. 7.8% O c. 8.7% ○ d. 10% O e. 80.7%

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)

8th Edition

ISBN:9781285065137

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter13: Capital Structure And Leverage

Section: Chapter Questions

Problem 11P: RECAPITALIZATION Currently, Bloom Flowers Inc. has a capital structure consisting of 20% debt and...

See similar textbooks

Similar questions

INPUTS (In millions) Free cash flow Marketable Securities Notes payable (short-term debt) Long-term bonds Preferred stock WACC Number of shares of stock Free cash flow Long-term constant growth in FCF Horizon value PV of horizon value 3 Value of operations 4 Plus value of narketable securities 5 Total value of company Current 0 a. Calculate the estimated horizon value (i.e., the value of operations at the end of the forecast period immediately after the Year-4 free cash flow). Assume FCFs grow constantly after year 3. 3 PV of FCF 9 Value of operations (PV of FCF + - HV) 0 1 c. Calculate the estimated Year-0 price per share of common equity. 2 6 Less value of debt 7 Less value of preferred stock 8 $40 $100 $300 $50 9.00% 40 Estimated value of common equity 9 Divided by number of shares 0 Price per share 1 Current 0 1 -$20.0 Year 1 -$20.0 Projected 2 $20.0 b. Calculate the present value of the horizon value, the present value of the free cash flows, and the estimated 5 Year-0 value of…
TOPIC WEIGHTED AVERAGE What is the company’s WACC if the tax rate is 30%? Debt = 10,000, 6% semiannual coupon bonds outstanding with a par value of 1,000 and 25 years to maturity. The bonds sell for 105% of par. Common stock = 400,000 shares outstanding, selling for RM60 per share and the beta is 1.10. The market risk premium is 7% and the risk-free rate is 5%. Preferred stock = 18,000 shares of 3% outstanding. Current selling for 80% share. The par value is 100 per share.
Calculate WACC from following data. Risk free rate 1.63% total debt $78.93 billion Market Cap $2580 billion Beta 0.86 Corporate Bond rate 3.10% CAPM S&P historical return 5.90% Tax Rate 21% please show steps
Clear my choice Gordon Growth Company is expected to pay a dividend of $4 next period and dividends are expected to grow at 6% per year. The required return is 16%. What is the price expected to be in year 4? O a. $10 O b. $50.50 c. $41.6 O d. $40 Clear my choice 11 intend to purchase a 10-year $1.000 face value bond that pays interest of $60 every
The capital structure of a publicly traded company contains a single debt issue with the following characteristics: Fixed coupon-paying bond issue (semiannual pay) Par value: $80 million Coupon rate: 6% Remaining maturity: 10 years Current price: 110% of par value What is the company's cost of debt?
Calculate the WACC for Aya Ltd, using the following: 5,000 outstanding, 6% semi-annual coupon bonds, with 25 Debt. years to maturity and selling for 105; 175,000 shares outstanding, selling for $58.00 per share, Common Stock: with a beta of 1.10 Market: equity risk premium of 7% and 5% risk free rate. Tax Rate: 35%
K EBIT-EPS and capital structure Data-Check is considering two capital structures. The key information is shown in the following table. Assume a 40% tax rate. Source of capital Long-term debt Common stock Structure A $99,000 at 15.6% coupon rate 5,000 shares Structure B $198,000 at 16.6% coupon rate 2,500 shares a. Calculate two EBIT-EPS coordinates for each of the structures by selecting any two EBIT values and finding their associated EPS values. b. Plot the two capital structures on a set of EBIT-EPS axes. c. Indicate over what EBIT range, if any, each structure is preferred. d. Discuss the leverage and risk aspects of each structure. e. If the firm is fairly certain that its EBIT will exceed $78,000, which structure would you recommend? Why?
RECAPITALIZATION Currently, Bloom Flowers Inc. has a capital structure consisting of 20% debt and 80% equity. Blooms debt currently has an 8% yield to maturity. The risk-free rate (rRF) is 5%, and the market risk premium (rM rRF) is 6%. Using the CAPM, Bloom estimates that its cost of equity is currently 12.5%. The company has a 40% tax rate. a. What is Blooms current WACC? b. What is the current beta on Blooms common stock? c. What would Blooms beta be if the company had no debt in its capital structure? (That is, what is Blooms unlevered beta, bU?) Blooms financial staff is considering changing its capital structure to 40% debt and 60% equity. If the company went ahead with the proposed change, the yield to maturity on the companys bonds would rise to 9 5%. The proposed change will have no effect on the companys tax rate. d. What would be the companys new cost of equity if it adopted the proposed change in capital structure? e. What would be the companys new WACC if it adopted the proposed change in capital structure? f. Based on your answer to Part e, would you advise Bloom to adopt the proposed change in capital structure? Explain.
RECAPITALIZATION Currently, Forever flowers Inc. has a capital structure consisting of 25% debt and 75% equity. Forever's debt currently has a 7% yield to maturity. The risk-free rate (rRF) is 6%, and the market risk premium (rM - rRF) is 7%. Using the CAPM, Forever estimates that its cost of equity is currently 14.5%. The company has a 40% tax rate. a. What is Forever's current WACC? b. What is the current beta on Forever's common stock? c. What would Forever's beta be if the company had no debt in its capital structure? (That is, what is Forever's unlevered beta, bU?) Forever's financial staff is considering changing its capital structure to 40% debt and 60% equity. If the company went ahead with the proposed change, the yield to maturity on the company's bonds would rise to 10.5%. The proposed change will have no effect on the company's tax rate. d. What would be the company's new cost of equity if it adopted the proposed change in capital structure? e. What would be the company's new WACC if it adopted the proposed change in capital structure? f. Based on your answer to part e, would you advise Forever to adopt the proposed change in capital structure? Explain.
RECAPITALIZATION Currently, Forever Flowers Inc. has a Capital structure consisting of 25% debt and 75% equity. Forever's debt currently has a 7% yield to maturity. The risk-free rate (rRF) is 6%and the market risk premium (rMrRF) is 7%. Using the CAPM, Forever estimates that its cost of equity is currently 14.5%. The company has a 40% tax rate. a. What is Forevers current WACC? b. What is the current beta on Forevers common stock? c What would Forever's beta be if the company had no debt in its capital structure? (That is, what is Forever's unlevered beta, buy? Forever's financial staff is considering changing its capital structure to 40% debt and 60% equity. If the company went ahead with the proposed change, the yield to maturity on the company's bonds would rise to 10.5%. The proposed change will have no effect on the companys tax rate d What would be the companys new cost of equity if it adopted the proposed change in capital structure? e. What would be the company's new WACC if it adopted the proposed change in capital structure? f. Based on your answer to part e, would you advise Forever to adopt the proposed change in capital structure? Explain.
Hasting Corporation is interested in acquiring Vandell Corporation. Vandell has 1 million shares outstanding and a target capital structure consisting of 30% debt; its beta is 1.4 (given its target capital structure). Vandell has $10.82 million in debt that trades at par and pays an 8% interest rate. Vandell’s free cash flow (FCFJ is $2 million per year and is expected to grow at a constant rate of 5% a year. Vandell pays a 40% combined federal and state tax rate. The risk-free rate of interest is 5%, and the market risk premium is 6%. Hasting’s First step is to estimate the current intrinsic value of Vandell. What are Vandell’s cost of equity and weighted average cost of capital? What is Vandell’s intrinsic value of operations? [Hint: Use the free cash flow corporate valuation model from Chapter 8.) What is the current intrinsic value of Vandell’s stock?
WACC Estimation On January 1, the total market value of the Tysseland Company was $60 million. During the year, the company plans to raise and invest $30 million in new projects. The firm’s present market value capital structure, shown here, is considered to be optimal. There is no short-term debt. New bonds will have an 8% coupon rate, and they will be sold at par. Common stock is currently selling at $30 a share. The stockholders’ required rate of return is estimated to be 12%, consisting of a dividend yield of 4% and an expected constant growth rate of 8%. (The next expected dividend is $1.20, so the dividend yield is $1.20/$30 = 4%.) The marginal tax rate is 40%. In order to maintain the present capital structure, how much of the new investment must be financed by common equity? Assuming there is sufficient cash flow for Tysseland to maintain its target capital structure without issuing additional shares of equity, what is its WACC? Suppose now that there is not enough internal cash flow and the firm must issue new shares of stock. Qualitatively speaking, what will happen to the WACC? No numbers are required to answer this question.