Jack's Construction Co. has 80 bonds outstanding that are selling at their par value of $1,00O each. Bonds with similar characteristics are yielding a pretax 8.6 percent. The firm also has 4,000 shares of common stock outstanding. The stock has a beta of 1.2 and sells for $40 a share. The U.S. T-bill is yielding 4 percent, the market risk premium is 8 percent, and the firm's tax rate is 25 percent. What is the firm's weighted average cost of capital assuming its earnings are sufficient to classify all interest as a tax-deductible expense?

Jack's Construction Co. has 80 bonds outstanding that are selling at their par value of $1,00O each. Bonds with similar characteristics are yielding a pretax 8.6 percent. The firm also has 4,000 shares of common stock outstanding. The stock has a beta of 1.2 and sells for $40 a share. The U.S. T-bill is yielding 4 percent, the market risk premium is 8 percent, and the firm's tax rate is 25 percent. What is the firm's weighted average cost of capital assuming its earnings are sufficient to classify all interest as a tax-deductible expense?

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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Bermuda Cruises issues only common stock and coupon bonds. The firm has a debt-equity ratio of 1.21. The cost of equity is 12.5 percent and the pretax cost of debt is 7.1 percent. What is the capital structure weight of the firm's equity if the firm's tax rate is 40 percent?
Ripple Wine Merchants has 10,700 shares of stock outstanding at a price per share of $63. The risk-free rate is 2.8% and the expected market return is 9.8 %. Ripple has a beta of 1.59. The company also has 320 bonds outstanding, with a par value of $1000 per bond. The after-tax cost of debt is 5.89% and the bonds sell for 93.6% of par. What is the firm's WACC if the tax rate is 21%? O Multiple Choice 9.52% 9.44% 9.78% 9.14%
XYZ Banks Inc. is a short-term lender. XYZ is all equity financed. XYZ has 20 million shares outstanding which trade for P7 per share. XYZ's shareholders require a return of 9%. Cash-Mart Financial is also a short-term lender. It's shares are trading for P15 per share. Cash-Mart has 10 million shares outstanding. Cash-Mart's corporate bonds are rated BB and are trading for 87.5% of face value to yield 7%. The face value of Cash-Mart's debt is P100 million. What is the required return of Cash-Mart's shareholders? (Assume that the tax rate is 0%.)
A company just paid $1.23 in dividends per share, and it has a dividend payout of 38%. Considering that the PE ratio is 8 times, determine the price of this company’s individual stocks. d. If the coupon rate of a bond is 3.05% and the yield to maturity is 6.48%, and if a bondholder has a marginal tax rate of 21%, determine their after tax yield in this case.
BHP Billiton, an Australian company, just paid $0.85 as a dividend, which is expected to grow at 5.0 per cent. Its most recent stock price is $72. Further, the company has a debt issue outstanding with 23 years to maturity that is quoted at 60 per cent of face value. The issue makes semiannual payments and has an embedded cost of 6 per cent annually. It considers a debt-equity ratio of 0.60 and a 22 per cent corporate tax rate. This year, the company has an EBIT of $3.15 million. Depreciation, the increase in net working capital, and capital spending were $265,000, $105,000, and $495,000, respectively. Therefore, you expect that over the next five years, EBIT will grow at 15 per cent per year, depreciation and capital spending will grow at 20 per cent per year, and NWC will grow at 10 per cent per year. It also has $19.5 million in debt and 400,000 shares outstanding. After Year 5, the adjusted cash flow from assets is expected to grow at 3.50 per cent indefinitely. Answer the…
McCann Catching, Inc. has 3.00 million shares of stock outstanding. The stock currently sells for $12.79 per share. The firm's debt is publicly traded and was recently quoted at 89.00% of face value. It has a total face value of $19.00 million, and it is currently priced to yield 10.00%. The risk free rate is 3.00% and the market risk premium is 8.00%. You've estimated that the firm has a beta of 1.20. The corporate tax rate is 34.00%. The firm is considering a $45.89 million expansion of their production facility. The project has the same risk as the firm overall and will earn $11.00 million per year for 7.00 years. What is the NPV of the expansion? (answer in terms of millions, so 1,000,000 would be 1.0000)
The company Nexti AS has 2 million shares outstanding with a market price of NOK 30 per share and with an equiry beta equal to 1.5. The book value of equity is NOK 40 million. The company also has NOK 70 million in long-term debt, the debt beta is equal to zero. Risk-free interest rate is 3% and the market risk premium is 7%. The company pays 30% income tax. (There is nobody investor tax, Se=Sk=0) a) What would the value of the company be worth if it were 100% equity financed? b) What would the company's cost of equity be if the company is financed with 100% equity?

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