Kyma Inc. currently has zero debt. It is a zero growth company, and it has the data shown below. Now the company isconsidering using some debt, moving to the new debt/assets ratio indicated below. The money raised would be used torepurchase stock at the current price. It is estimated that the increase in risk resulting from the additional leverage would causethe required rate of return on equity to rise somewhat, as indicated below. If this plan were carried out, by how much would theWACC change, i.e., what is WACCold - WACCNew?New Debt/Assets35%Orig. cost of equity, rs10.0%New Equity/Assets65%New cost of equity = rs11.0%Interest rate new = rd 7.0%Tax rate40.0%O1.72%O2.06%1.38%1.04%

WACC is the overall average cost of the all sources of the finance. It is equal to the sum of…

Answered: Kyma Inc. currently has zero debt. It…

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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Labrador technologies Inc. plans to become public soon. The board of directors would like to know the value of common equity and have asked for your opinion. The firm has $1,249,917 in preferred equity and the market value of its outstanding debt equals $2,049,396. The WACC for this firm is estimated to be 8.92%. For this example assume the current assets are zero. Use the DCF valuation model with the expected FCFs shown below; year 1 represents one year from today and so on. The company expects to grow at a 3.0% rate after Year 5. Rounding to the nearest penny, what is the value of common equity? Free Cash Period Flow Year 1 $1,370,274 Year 2 $1,761,479 Year 3 $1,909,652 Year 4 $2,361,090 Year 5 $2,744,645
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