LEX Corp. currently has a WACC of 23 percent. If the cost of debt capital for the firm is 11 percent and the firm is currently financed with 40 percent debt, then what is the current cost of equity capital for the firm? Assume that the assumptions in Modigliani and Miller’s Proposition 1 hold. (Round answer to 2 decimal places, e.g. 17.54%.)

LEX Corp. currently has a WACC of 23 percent. If the cost of debt capital for the firm is 11 percent and the firm is currently financed with 40 percent debt, then what is the current cost of equity capital for the firm? Assume that the assumptions in Modigliani and Miller’s Proposition 1 hold. (Round answer to 2 decimal places, e.g. 17.54%.)

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

Similar questions

A firm has 4000m in balance sheet debt (book value is equal to market value in this case) and 1000m in capitalized leases. Market value of equity is 10000m. You can use book value of debt to approximate its market value. If you were to use this information in the calculation of WACC, what is Wd? O 40.00% O 28.57% O 33.33% O 50.00%
Ch. 13. For questions 7, 8, and 9, use the following information: 7.) Consider a firm whose debt has a market value of $35 million and whose stock has a market value of $55 million. The firm pays a 7 percent rate of interest on its new debt and has a beta of 1.23. The corporate tax rate is 21%. Assume that the security market line holds, that the risk premium on the market is 10.5 percent, and that the current Treasury bill is rate is 1 percent. What is the aftertax cost of debt? Format as a percentage and round to two places past the decimal point as "X.XX" 8.) Consider a firm whose debt has a market value of $35 million and whose stock has a market value of $55 million. The firm pays a 7 percent rate of interest on its new debt and has a beta of 1.23. The corporate tax rate is 21%. Assume that the security market line holds, that the risk premium on the market is 10.5 percent, and that the current Treasury bill is rate is 1 percent. Using the pretax cost of debt from Question 7,…
c. What will the marginal cost of capital be immediately after that point? (Equity will remain at 45 percent of the capital structure, but will all be in the form of new common stock, Kn.) Note: Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Marginal cost of capital % d. The 5.0 percent cost of debt referred to above applies only to the first $36 million of debt. After that, the cost of debt will be 8.5 percent. At what size capital structure will there be a change in the cost of debt? Note: Enter your answer in millions of dollars (e.g., $10 million should be entered as "10"). Capital structure size (Z) million e. What will the marginal cost of capital be immediately after that point? (Consider the facts in both parts cand d.) Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Marginal cost of capital %
Assume that Firms U and L are in the same risk class and that both have EBIT=$500,000. Firm U uses no debt financing, and its cost of equity is rsU=14%. Firm L has $1 million of debt outstanding at a cost of rd=8%. There are no taxes. Assume that the MM assumptions hold. Graph (a) the relationships between capital costs and leverage as measured by D/V and (b) the relationship between V and D. Now assume that Firms L and U are both subject to a 40% corporate tax rate. Using the data given in Part b, repeat the analysis called for in b(1) and b(2) using assumptions from the MM model with taxes.
29. Mackenzie Company has a price of $36 and will issue a dividend of $2.00 next year. It has a beta of1.2, the risk-free rate is 5.5%, and the market risk premium is estimated to be 5.0%. a. Estimate the equity cost of capital for Mackenzie. What ___% b. Under the CDGM, at what rate do you need to expect Mackenzie's dividends to grow to get the same equity cost of capital as in part (a)? What __% **round to two decimal places**
Your firm has a Return on Assets of 8.00 % , the firm can issue debt at 3.50% regardless of the leverage, and the firm's marginal tax rate is 25% . If the firm'sdebt - to - asset ratio is 24 % , what is the Cost of Equity Capital within the 1963 Miller & Modigliani framework? Group of answer choices9.35% 9.78% 6.77% 9.07% 8.81%
A1. Payout policy (Answer all parts of this question.) (a) , What is the main theorem of Modigliani and Miller regarding the payout policy of firms? Explain. 1 (b) List four assumptions that must hold for the Modigliani-Miller theorem to be valid. (c) Consider a company that has 100 million shares outstanding. The market value of the company is currently at GBP 5 billion. Last year, the company paid out an annual dividend of GBP 2 per share. This year, the company intends to double the dividend to shareholders, but since the company has not enough cash, the company intends to raise the additional money required to pay the dividend in rights issue. i. ( If the price of a new share offered is GBP 25, what is the fair value of a right to buy a new share? Hint: The company first pays the dividends, and then raises the capital. ii. ( ) Contrary to theory, however, as soon as the company announces the rights issue, the share price drops. Why? Think of a reason why this transaction, i.e.,…
which option is correct
Stevenson's Bakery is an all-equity firm that has projected perpetual EBIT of $183,000 per year. The cost of equity is 13.1 percent and the tax rate is 21 percent. The firm can borrow perpetual debt at 6.3 percent. Currently, the firm is considering converting to a debt–equity ratio of .93. What is the firm's levered value? MM assumptions hold. A. $829,786 B. $1,215,262 C. $1,155,579 D. $997,511 E. $921,985
23) can i please get help?
Lynx Corp. currently has a WACC of 18 percent. If the cost of debt capital for the firm is 11 percent and the firm is currently financed with 50 percent debt, then what is the current cost of equity capital for the firm? Assume that the assumptions in Proposition 1 hold. (Round answer to 2 decimal places, e.g. 17.54%.)
The assets of company X have a beta equal to 1. Assume that the company's debt has a beta equal to 0.5 and that X's equity has a beta equal to 2. Consider an investor who holds 10% of the company's total debt liabilities and 10% of the company's equity. The beta of the investor's portfolio is equal to A) 0.1 B)1 C) 0.25 D) 1.25