FM Foods is evaluating its cost of capital. Use the following information provided on December 31, 2017, to estimate FM's after-tax cost of equity capital. Yield to maturity on long-term government bonds: 4.4% Yield to maturity on company long-term bonds: 6.3% Coupon rate on company long-term bonds: 7% Historical excess return on common stocks: 6.5% Company equity beta: 1.20 Stock price: $40.00 Number of shares outstanding (millions): 240 Book value of equity (millions): $5,240 Book value of interest-bearing debt (millions): $1,250 Tax rate: 35.0%
Q: McPherson Company must purchase a new milling machine. The purchase price is $50,000, including…
A: Salvage value net of tax is that which is received by the investor at the end of project life from…
Q: Initial cash outlay is $50,000. The required rate of return is 9%. The length of time of the…
A: Solution:Net Present Value (NPV) means the net present value of cash inflows from the project after…
Q: An analyst observes a Widget & Co. 7.125 percent, 4-year, semiannual-pay bond trading at 102.347…
A: Yield to put is the rate of return that the bondholder will earn if he holds the bond till it's put…
Q: A bank has $223 million in assets in the O percent risk-weight category. It has $363 million in…
A: Risk weighted asset= 0%* category 1 asset + 20%* category 2 asset+ 50% *category 3 asset+ 100%*…
Q: 1. A fund manager expects a surge in the Turkish stock market in a month and wishes to invest $10…
A: Swap points can be used to determine the forward exchange rate. We need to add the given swap points…
Q: A businessman obtains a loan of $100,000 for a 5-year term with an interest rate of 7% per year,…
A: The loans are paid by periodic payments and these payments carry the payment for interest and loan…
Q: A project has a forecasted cash flow of $121 in year 1 and $132 in year 2. The interest rate is 8%,…
A: To calculate the required rate of return the CAPM formula is used and then discounts the cash flows…
Q: Solve for ( A) initial investment (B) cash back period (C)Net present value
A: Capital budgeting is the process by which a company evaluates and selects long-term investment…
Q: Allegience Insurance Company’s management is considering an advertising program that would require…
A: Npv is also known as Net Present Value. It is a capital budegting technique which helps in decision…
Q: In each of the following cases, find the unknown variable. Ignore taxes. (Do not round intermediate…
A: Accouting break even point is that point of sales at which no profit / no loss at that point of sale…
Q: A project with a life of 11 has an initial fixed asset investment of $42,000, an initial NWC…
A: By turning an asset's expenses and benefits into an equal yearly amount, equal Annual Cost (EAC) is…
Q: The current price of a stock is $50, and the annual risk-free rate is 5.5%. A call option with a…
A: Value of call option = C0 = $13.78Current price of the stock = S0 = $50Strike price = K = $43Risk…
Q: A firm has a bank loan with a 10% interest rate. The firm also has in issue 8% preference shares…
A: Cost of Debt = cd = 10%Cost of Preferred Stock= cp = 8%Cost of Equity = ce = 18%Tax Rate = t =…
Q: Lingenburger Cheese Corporation has 7.1 million shares of common stock outstanding, 255,000 shares…
A: Weighted average cost of capital (WACC):The weighted average cost of capital (WACC) is a financial…
Q: You bought a condo 2 years ago. To finance the purchase, you took out a mortgage for $575,000. The…
A: In loan amortization loans are divided into small payments and equal payments that carry the payment…
Q: You are evaluating a project for The Ultimate recreational tennis racket, guaranteed to correct that…
A: After tax salvage value at the terminal year of the project is calculated as shown below.
Q: Sidman Products's common stock currently sells for $42 a share. The firm is expected to earn $3.36…
A: We need to use constant growth model to calculate growth rate. P0 = D1/(rs-g) Where D 1 =next…
Q: Suppose that Gyp Sum Industries currently has the balance sheet shown below, and that sales for the…
A: The AFN refers to the funding that is required by the company for its operations to reach the…
Q: A company just paid a dividend of $0.40. The dividends are expected to grow at a rate of 7% for the…
A: Dividends refer to share of profits by a company with its shareholders. The management of a company…
Q: O 12 O B O A piece of newly purchased Industrial equipment costs $968,662.00 and is classified as a…
A: The Modified Accelerated Cost Recovery System (MACRS) is a tax depreciation method used in the…
Q: You are evaluating a project for The Ultimate recreational tennis racket, guaranteed to correct that…
A: Cash flows refers to the series of payments made or received over the period of time. Cash flows can…
Q: Jack enjoys spending his vacations in Las Vegas. He’s especially fond of playing Roulette and…
A: The objective of this question is to understand how gambling winnings and losses are reported on…
Q: ou purchased a new washer and dryer for $1,297.07 (including sales tax and delivery). Financing was…
A: Cost of a loan is that amount which is required to be paid by the borrower to lender addition to the…
Q: Oregon Forest Products will acquire new equipment that falls under the five-year MACRS category. The…
A: NPV is also known as Net Present Value.. It is a capital budgeting technique which helps in decision…
Q: 4. Calculate the effective annual rate of a loan that charges 1.2% per month. Select one: A. 15.4%…
A: The objective of the question is to calculate the effective annual rate (EAR) of a loan that charges…
Q: Suppose your company needs to raise $40.3 million and you want to issue 30-year bonds for this…
A: Bond are financial instrument, issued to raise funds from the outside market that represent a loan…
Q: How does a manager differentiate when to use capital budgeting versus simple return on investment…
A: The objective of the question is to understand the circumstances under which a manager would choose…
Q: $1,000 corporate bond has a maturity date 20 years from now and a coupon rate of 6 percent paid…
A: Price of bond is the present value of coupon payments plus present value of the par value of the…
Q: LO 5 3 points Skipped eBook Hint References Fill in the missing numbers for the following income…
A: Sales = $666,200Costs = $428,500Depreciation = $102,500Tax rate = 25%EBIT =?Net Income =?
Q: o. Compare and contrast different methods of capital reconstruction, such as share buybacks,…
A: Capital reconstruction refers to the process by which a company reorganizes its capital structure,…
Q: Find the cost if the project is paid full before it starts.
A: Present value illustrates the current value of a sum of money that will be received or paid in the…
Q: The Adeeva's gross monthly income is $3600. They have 18 remaining payments of $370 on a new car.…
A: Mortgage is the contract between the two parties one willing to borrow money and another willing to…
Q: Caspian Sea Drinks is considering the purchase of a new water filtration system produced by Rube…
A: Net present value(NPV) is the difference between present value of all cash inflows and initial…
Q: Management of Oriole Measures, Inc., is evaluating two independent projects. The company uses a 13.5…
A: Internal rate of return is the discount rate of a project wherein its net present value equals zero.…
Q: Cost of debt with fees. Kenny Enterprises will issue a bond with a par value of $1,000, a maturity…
A: To calculate the cost of debt for Kenny Enterprises, we need to use the following formula:Cost of…
Q: Calculate the initial outlay and depreciable value of the project. B. Calculate the annual…
A: Net Present Value (NPV):Net Present Value (NPV) is a financial concept widely used in investment…
Q: Suppose that Gyp Sum Industries currently has the balance sheet shown below, and that sales for the…
A: The AFN refers to the funding that is required by the company for its operations to reach the…
Q: You have a portfolio of six stocks. The portfolio weights of each stock and each stock's beta are…
A: Beta of portfolio comprising of multiple stocks is computed as follows:-Bp = whereBi = beta of stock…
Q: Quartzite. The spot rate for Mexican pesos is Ps12.44 = $1.00. If the U.S.-based company Quartzite…
A: Spot RateSpot rate also known as Spot price refers to the rate/price at which a given currency can…
Q: OpenSeas, Inc. is evaluating the purchase of a new cruise ship. The ship will cost $500 milion and…
A: Here,Initial Investment is $500 millionAnnual Inflows is $71.6 millionDiscount Rate is 12.2%Time…
Q: will be 26% debt financed, and you anticipate its debt cost of capital will be 5%. If its corporate…
A: The weighted average cost of capital measures the typical cost a business pays to finance its…
Q: - Subway, with more than 27,000 outlets in the U.S., is planning for a new restaurant in Buffalo,…
A: Total weighted score is a calculated value that combines individual scores assigned to different…
Q: In cell E16, enter the appropriate formula to calculate the probability of either rolling a 7 or 11.
A: The objective of the question is to calculate the probability of rolling a 7 or 11 on a pair of…
Q: Comparing all methods. Given the following after-tax cash flow on a new toy for Tyler's Toys, find…
A: According to bartleby guidelines , if question involves multiple sub parts , then 1st sub 3 parts…
Q: Two years ago, Capricorn Inc. purchased an Asset A for $66,000. The asset yields annual operating…
A: We need to calculate net present value (NPV)of replacement machine which is the difference between…
Q: State whether the following characteristics are pri- marily associated with public or private sector…
A: The characteristics mentioned can be associated with either public or private sector projects, and…
Q: Unless stated otherwise, interest is compounded annually, and payments occur at the end of the…
A: The leverage value refers to the total value of a company when it uses debt or leverage to finance…
Q: Find the Future Worth of 2,637 pesos yearly payment with an interest of 0.46% for 22 years.
A: Yearly Payment $ 2,637Number of Payments22Interest Rate0.46%
Q: NeNe, a 60-year-old-widower, has the following taxable income in 2022: Interest income: $3,200 Form…
A: The question is asking for the maximum amount that NeNe can contribute to her traditional Individual…
Q: You are 30 years old today. You want to retire at the age of 55. You expect to live until age 90.…
A: Retirement planning is quite necessary and that should be done based on time value of money and…
- FM Foods is evaluating its cost of capital. Use the following information provided on December 31, 2017, to estimate FM's after-tax
cost of equity capital.- Yield to maturity on long-term government bonds: 4.4%
- Yield to maturity on company long-term bonds: 6.3%
- Coupon rate on company long-term bonds: 7%
- Historical excess return on common stocks: 6.5%
- Company equity beta: 1.20
- Stock price: $40.00
- Number of shares outstanding (millions): 240
- Book value of equity (millions): $5,240
- Book value of interest-bearing debt (millions): $1,250
- Tax rate: 35.0%
Unlock instant AI solutions
Tap the button
to generate a solution
Click the button to generate
a solution
- Use the following information to compute the weighted average cost of capital (WACC) of GoGo Inc. ▪ Debt information: The beta of GoGo Inc. stock is 1.5 . Risk-free rate is 4% • Market return is 15% • GoGo's capital structure is 65% equity and 35% debt. The tax rate is 21%. 14.62% Bonds will mature in 9 years. The maturity value is $1,000. GoGo's WACC is.. 15.47% The coupon rate is 8%, with semiannual payments. The current bond price is $1,015. 12.20% 13.32%The following data refers to Company Z: - Beta = 1.7 - Required return on debt (yield to maturity on a long term bond) = 3.1% - Tax rate = 21% - 30-year government bond = 2.3% - Market risk premium can be assumed to be 5% Estimate the cost of capital (WACC) for Company Z.You have the following information on a company on which to base your calculations and discussion: Cost of equity capital (rE) = 18.55% Cost of debt (rD) = 7.85% Expected market premium (rM –rF) = 8.35% Risk-free rate (rF) = 5.95% Inflation = 0% Corporate tax rate (TC) = 35% Current long-term and target debt-equity ratio (D:E) = 2:5 a. What are the equity beta (bE) and debt beta (bD) of the firm described above?[Hint: Assume that the above costs of capital have been generated by an appropriate equilibrium model.] b. What is the weighted-average cost of capital (WACC) for this firm at the current debt-equity ratio? c. What would the company’s cost of equity capital become if you unlevered the capital structure (i.e. reduced gearing until there is no debt)
- A project hasan equity beta of 1.10 (based on similar listed company after making all necessary adjustments); the market risk premium is expected to be 59% and the yield on government bonds has been and remains at 7.5%. Determine the company's cost of equity based on the Capital Asset Pricing Model (CAPM)For a particular firm, the purchasers of common stock require an 11% rate of return, bonds are sold at a 7% interest rate, and bank loans are available at 9%. Compute the cost of capital or WACC for the following capital structureOther relevant information about the company follows: The 20-year Treasury Bond rate is currently 4.5 percent and you have estimated market-risk premium to be 6.75 percent using the returns on stocks and Treasury bonds from 2010 to 2019. Pharmos Incorporated has a marginal tax rate of 25 percent. Required: Answer the following questions given the information above Calculate to the following for Pharmos considering its tax rate of 25%: i) Cost of Equity (answer in %)
- Calculate the cost of equity with the CAPM Calculate the cost od debt based on what the company is currently paying for its debt - Beta of the industry = 1.16 - Equity Risk Premium = 6.97% - Risk-free rate = 3.77% - Objective capital structure of the industry = 13.24%Biotec has estimated the costs of debt and equity capital for various proportions of debt in its capital structure: % of Debt Cost of Debt (%) Cost of Equity (%) 35 5.4 13.8 40 5.6 14.0 45 5.9 14.3 50 6.4 14.7 If Biotec pays a current dividend of $1.00 and expects dividends to grow at a constant rate of 7%, what is Biotec's stock price if it obtains its optimal capital structure?(Individual or component costs of capital) Compute the cost of capital for the firm for the following a. Currently bonds with a similar credit rating and maturity as the firm's outstanding debt are selling to yield 8.84 percent while the borrowing firm's corporate tax rate is 34 percent. b. Common stock for a firm that paid a $1.02 dividend last year. The dividends are expected to grow at a rate of 4 1 percent per year into the foreseeable future. The price of this stock is now $25 56, c. A bond that has a $1,000 par value and a coupon interest rate of 11.2 percent with interest paid semiannually. A new issue would sell for $1,151 per bond and mature in 20 years. The firm's tax rate is 34 percent d. A preferred stock paying a dividend of 7.7 percent on a $107 par value. If a new issue is offered, the shares would sell for $84 71 per share a. The after-tax cost of debt debit for the firm is (Round to two decimal places)
- The cost of raising capital through retained earnings is the cost of raising capital through issuing new common stock. The cost of equity using the CAPM approach The current risk-free rate of return (rRFrRF) is 3.86% while the market risk premium is 6.17%. The Burris Company has a beta of 0.92. Using the capital asset pricing model (CAPM) approach, Burris's cost of equity is The cost of equity using the bond yield plus risk premium approach The Taylor Company is closely held and, therefore, cannot generate reliable inputs with which to use the CAPM method for estimating a company's cost of internal equity. Taylor's bonds yield 11.52%, and the firm's analysts estimate that the firm's risk premium on its stock over its bonds is 4.95%. Based on the bond-yield-plus-risk-premium approach, Taylor's cost of internal equity is: 16.47% 19.76% 18.12% 15.65% The cost of eguity usina the discOunted.cash flow for dividend.aroutb) approachA financial analyst wants to compute a company's weighted average cost of capital (WACC) using the dividend discount model. The company has a before-tax cost of new debt of 9%, tax rate of 37.5%, target debt-to-equity ratio of 0.76, current stock price of $74, estimated dividend growth rate of 7% and will pay a dividend of $3.2 next year. What is the company’s WACC A. 8 percent. B. 9 percent. C. 10 percent. D. 11 percent.b) Country Markets has an unlevered cost of capital of 12 percent, a taxrate of 38 percent, and expected earnings before interest and taxesof $15,700. The company has $12,000 in bonds outstanding that have aISSUED BY THE CI, MGMT3048 ON JUNE 11, 2023 36 percent coupon and pay interest annually. The bonds are selling atpar value. What is the cost of equity?