Globex Corp. is an all-equity firm, and it has a beta of 1. It is considering changing its capital structure to 60% equity and 40% debt.The firm's cost of debt will be 6%, and it will face a tax rate of 25%.What will Globex Corp.'s beta be if it decides to make this change in its capital structure?Now consider the case of another company:US Robotics Inc. has a current capital structure of 30% debt and 70% equity. Its curreis 25%. It currently has a levered beta of 1.15. The risk-free rate is 3.5%, and the risk1.651.581.801.50e-tax cost of debt is 6%, and its tax ratem on the market is 7.5%. US Robotics

Since Globex Corp has changed its capital structure from unlevered firm to levered firm, we need to…

Globex Corp. is an all-equity firm, and it has a beta of 1. It is considering changing its capital structure to 60% equity and 40% debt. The firm's cost of debt will be 6%, and it will face a tax rate of 25%. What will Globex Corp.'s beta be if it decides to make this change in its capital structure? ow consider the case of another company: US Robotics Inc. has a current capital structure of 30% debt and 70% equity. Its curre 1.65 1.58 1.80 e-tax cost of debt is 6%, and its tax rate

Globex Corp. is an all-equity firm, and it has a beta of 1. It is considering changing its capital structure to 60% equity and 40% debt. The firm's cost of debt will be 6%, and it will face a tax rate of 25%. What will Globex Corp.'s beta be if it decides to make this change in its capital structure? ow consider the case of another company: US Robotics Inc. has a current capital structure of 30% debt and 70% equity. Its curre 1.65 1.58 1.80 e-tax cost of debt is 6%, and its tax rate

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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Company X is considering an expansion. The project has an estimated internal rate of return equal to 8%. The company has a debt to equity ratio equal to one. The yield to maturity on its bonds is 5%, while the cost of the company’s equity is estimated to be 15%. The company’s CEO, who is keen on the expansion project, argues that the project would be profitable if the company were to entirely finance it by issuing debt. The CFO, however, is sceptical and believes there is a logical flaw in the CEO’s argument. Who do you think is right? In no more than 200 words, give reasons for your answer by referencing relevant corporate finance theories.
You are an analyst in the Finance department at a conglomerate, where the CFO believes the cost of equity is 10% and the WACC is 7.5%. A project has been proposed to create a new business line, and your manager asks you to calculate the NPV assuming the project is funded entirely by equity. Should you discount the CF’s using a) 10%, b) 7.5% or c) some other rate? Why?
Please show all steps or else skip, all parts pls i will definitely like or else dislike thanks
Air Tampa has just been incorporated, and its board of directors is grappling with the question of optimal capital structure. The company plans to offer commuter air services between Tampa and smaller surrounding cities. Air Tampa believes it would have the same business risk as Jaxair, which is an airline that has been around for a few years and that has had zero growth. Jaxair's market-determined beta is 1.8, and it has a current market value debt ratio (total debt to total assets) of 40% and a federal-plus-state tax rate of 25%. Air Tampa expects to have investment tax credits when it begins business, which reduces its federal-plus-state tax rate to 20%. Air Tampa's owners expect that the total book and market value of the firm's stock, if it uses zero debt, would be $16 million. Air Tampa's CFO believes that the MM and Hamada formulas for the value of a levered firm and the levered firm's cost of capital should be used because zero growth is expected. a. Estimate the beta of an…
You would like to estimate the weighted average cost of capital for a new airine business. Based on its industry asset beta, you have already estimated an unlevered cost of capital for the firm of 8%. However, the new business will be 23% debt financed, and you anticipate its debt cost of capital will be 5%. If its corporate tax rate is 30%, what is your estimate of its WACC? The equity cost of capital is. (Round to two decimal places.)
Sweetness Inc. produces a line of chocolate candies and has an optimal capital structure that is 50% debt and 50% equity. Sweetness has a beta of 1.2 and is considering expanding into the appetizer business. Sweetness’ primary competition in the appetizer business has a beta of 1.5 and a 40%/60% debt/equity mix. If the risk-free rate is 7%, the market risk premium is 8.5%, and the marginal tax rate is 40%, what is the cost of the equity-financed portion of Sweetness’ new investment

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