Let's return to Chattingham Industries. Recall Chattingham has a debt-equity ratio of 60 percent which itconsiders optimal.The following market data on Chattingham's securities is current:200,000 bonds with a coupon rate of 5.8 percent outstanding, 25 years to maturity, sellingfor 106 percent of par; $1,000 par value each and make semiannual payments.5 million shares outstanding, selling for $66 per share; the stock beta is 1.15.7 percent market risk premium; 3.1 percent risk-free rate.Net income for the most recent year was $10 million, and is expected to increase by 10 percent next year.Further assume yearly net income is expected to increase thereafter by 5 percent. Chattingham expects tomaintain its dividend payout ratio of 40 percent on the 5 million shares of common stock outstanding.Chattingham's tax rate is 30 percent.a. Determine the required return on Chattingham's levered equity.b. Determine the value of Chattingham Industries and then, based off of this value, determine the value of a)the company's equity and b) the company's debt. Clearly show your work.Debt:Commonstock:Market:

The Capital Asset Pricing Model (CAPM) aims to define a mathematical equation for calculations of…

Answered: Let's return to Chattingham Industries.…

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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If Smolinski, Incorporated, were an all-equity company, it would have a beta of.95. The company has a target debt - equity ratio of .50. The expected return on the market portfolio is 12 percent and Treasury bills currently yield 3.1 percent. The company has one bond issue outstanding that matures in 25 years, a par value of $1,000, and a coupon rate of 6 percent. The bond currently sells for $ 1,050. The corporate tax rate is 23 percent. a. What is the company's cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g ., 32.16.) b. What is the company's cost of equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c. What is the company' s weighted average cost of capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e. g., 32.16.)
What is the total market value of equity? SFE Inc. has 1 million shares of common stock outstanding at a book value of $40 per share. The stock trades for $50 per share. It also has $10 million in face value of debt (corporate bonds of 5 years with coupon rate 10.4%, paid semi-annually) that trades at 110% of face value. The company's common stock has a beta of 1.2. Treasury bills yield 2% and the market return is 10%. The corporate tax rate is 35%.
If Smolinski, Incorporated, were an all-equity company, it would have a beta of 1.20. The company has a target debt-equity ratio of 70. The expected return on the market portfolio is 10 percent and Treasury bills currently yield 3.5 percent. The company has one bond issue outstanding that matures in 30 years, a par value of $1,000, and a coupon rate of 6.4 percent. The bond currently sells for $1,070. The corporate tax rate is 22 percent. a. What is the company's cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the company's cost of equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c. What is the company's weighted average cost of capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. Cost of debt. b. Cost of equity c. WACC 5.00% 11.30 % 8.71%
am. 33.
Computer stocks currently provide an expected rate of return of 21%. MBI, a large computer company, will pay a year-end dividend of $3.00 per share. Required: If the stock is selling at $60 per share, what must be the market's expectation of the dividend growth rate? Note: Round your answer to 2 decimal places.
Your company follows a constant debt-to-equity ratio policy. Its debt is represented by a single zero coupon bond, with maturity one year, with face value 28,000,000 and whose value today is 24,500,000. The value of the firm’s assets in one year can be 55,000,000 with probability 40%, or 23,000,000 with probability 60%. If the unlevered return on equity is 8.50%, what is the expected return on levered equity? (Assume a Modigliani Miller world without taxation). The answer is 27.13% but how do you get to this result?
Your company follows a constant debt-to-equity ratio policy. Its debt is represented by a single zero coupon bond, with maturity one year, with face value 28,000,000 and whose value today is 24,500,000. The value of the firm’s assets in one year can be 55,000,000 with probability 40%, or 23,000,000 with probability 60%. If the unlevered return on equity is 8.50%, what is the expected return on levered equity? (Assume a Modigliani Miller world without taxation). rE=27.13% Give typing answer with explanation and conclusion
Vestal Corp. has a beta of 1.3, the market risk premium is 7% and the risk-free rate of interest is 4%. Vestal's preferred stock pays a dividend of $4 each year and trades at a price of $40 per share. Vestal's debt trades with a yield to maturity of 8.5%. The market value of equity, preferred stock and debt for Vestal Corp. are $80 billion, $40 billion and $120 billion, respectively. What is Vestal's weighted average cost of capital if its tax rate is 30%?
XYZ currently has common stock trading at $40 per share. XYZ just paid a dividend of $2.00 per share, which is expected to grow at a constant rate of 5%. XYZ's beta is 1.5, the risk-free rate is 2%, and the market return is expected to be 8%. The pre-tax yield on XYZ's bonds is 7%. XYZ's finance department believes that new stock would require a premium of 5% over their own bond yield. Flotation cost for issuing new stock is 10%. Compute the cost of retained earnings using the bond yield plus risk premium approach (show your answer in percent, and to 2 decimal places. Example: 9.62%). Question 4 options:
Spartan Machinery stock trades at $60 per share with a beta of 1.5, an estimated market return of 12%, and a risk free rate of 5%. There are 20 million shares outstanding. The company has bonds with a face value $1 billion outstanding and a market value of $980 million. The coupon rate is 9% (semiannual coupons) and there are 10 years to maturity. The company has a tax rate of 38%. What is the WACC?
4) Listen P Thorpe and Company is currently an all-equity firm. It has 3 million shares selling for $28 per share. Its beta is 0.85, and the current risk-free rate is 2.5%. The expected return on the market for the coming year is 13%. Thorpe will sell corporate bonds for $28,000,000 and retire common stock with the proceeds. The bonds are twenty-year semiannual bonds with a 10% coupon rate and $1,000 par value. The bonds are currently selling for $1,143.08 per bond. When the bonds sell, the company's beta will increase to 0.95. What was Thorpe and Company's WACC before the bond sale? Hint: The weight of equity before selling the bond is 100%.
Sunburn Sunscreen has a zero coupon bond issue outstanding with a face value of $30,000 that matures in one year. The current market value of the firm's assets is $31,800. The standard deviation of the return on the firm's assets is 36 percent per year and the annual risk-free rate is 4 percent per year, compounded continuously. Based on the Black-Scholes model, what is the market value of the firm's equity and debt? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Equity Debt

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