Now (use the following information) suppose that:- The cost of debt (rₑ) is 3.875% (before tax),- Flotation costs (F) = 7% of issue price,- The debt is trading at $1,025.00,- There are 7,250 bonds outstanding,- The tax rate is .35,- The LAST dividend paid yesterday (D₀) = $4.56,- The expected constant growth rate (g) = 2.75%,- Beta = 1.55,- rₑ = 1.14%,- RPₘ = 4.5%, (market risk premium)- The firm has 250,000 shares of common stock outstanding,- Common stock shares are trading at $47.32/share (P₀).- Given the above information, what is the Market value of the firm’s debt? $____________________- Given the above information, what is the Market value of the firm’s equity? $____________________- Now calculate the weight of debt for the firm (Wₑ). You will use this to calculate the WACC.- Now calculate the weight of equity for the firm (Wₑ). You will use this to calculate the WACC. What is the cost of existing common equity (retained earnings)? (Briefly describe your approach/method as well as your answer) What is the cost of NEW common equity? (Briefly describe your approach/method as well as your answer) What is the firm’s WACC using existing common equity? (Briefly describe your approach/method as well as your answer)

Market value of debt = No. of bonds trading in market * Price per bond = 7,250 * $1,025 =…

Answered: Given the above information, what is…

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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Similar questions

how did you get the yield on debt
Which statement is most correct? * A. Since debt financing raises the firm’s financial risk, increasing debt ratio will increase WACC. B. Since debt financing is cheaper than equity financing, increasing debt ratio will reduce WACC. C. Increasing a firm’s debt ratio will typically reduce the marginal costs of both debt and equity financing; however, it still may raise the firm’s WACC. D. Statements a and c are correct. E. None of the above
which one is correct please confirm? Q24: In determining the cost of debt, several factors must be considered. All of the following are those factors EXCEPT ____. a. flotation costs b. the firm’s growth rate of dividends c. the firm’s before-tax cost of debt d. the firm’s tax rate
is the symbol that represents the before-tax cost of debt in the weighted average cost of capital (WACC) equation.
The WACC is a weighted average of the costs of debt, preferred stock, and common equity. How should the capital structure weights used to calculate the WACC be determined? Would the WACC depend in any way on the size of the capital budget? How might dividend policy affect WACC? Explain
Consider two firms that are alike in every way except that Firm A has fixed rate debt in its capital structure and Firm B has variable rate debt. Which firm has riskier equity? Why?
I. The higher the financial leverage, the higher financial risk and the higher the cost of capital.II. Higher debt ratio, the higher the DFL and Required rate of return. The greater the degree of Financial Leverage, the greater the fluctuations in EPS. A• TF B• FF C• FT D• TT
The financial manager of a firm determines the following schedules of cost of debt and cost of equity for various combinations of debt financing: Debt/Assets After-Tax Cost of Debt Cost of Equity 0 % 4 % 8 % 10 4 8 20 4 8 30 5 9 40 6 10 50 8 12 60 10 14 70 12 16 Find the optimal capital structure (that is, optimal combination of debt and equity financing). Round your answers for the capital structure to the nearest whole number and for the cost of capital to one decimal place. The optimal capital structure: % debt and % equity with a cost of capital of % Why does the cost of capital initially decline as the firm substitutes debt for equity financing? The cost of capital initially declines because the firm cost of debt is than the cost of equity. Why will the cost of funds eventually rise as the firm becomes more financially leveraged? As the firm becomes more financially leveraged and riskier, the cost of…
What happens to the costs of debt and equity when leverageincreases? Explain.
(1) Why do analysts need to consider different factorswhen evaluating a company’s ability to repay shortterm versus long-term debt? (2) Would the currentamount of the owners’ equity be a reasonable price topay for a company? Why or why not?

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Given the above information, what is the Market value of the firm's debt? $. Given the above information, what is the Market value of the firm's equity? $. Now calculate the weight of debt for the firm (Wa). You will use this to calculate the WACC.