Little Lemon Co. is identifying the value of its equity using the enterprise value approach as they have never issued dividends to-date because the Company is still at its early stages. With this, they have the following available information: The government's real free rate for its debt securities is estimated at 3.5% with an estimated inflation premium of 1.5%. The target capital structure of Little Lemon is at 60% debt and 40% equity Little Lemon was able to determine that its cost of debt is estimated as: With 3 years maturity - 6.50% With 4 years maturity - 7.0% With 5 years maturity - 8.0% The following are the information about the current debts issued by Little Lemon A 3-year maturity instrument carries a Php500,000 face value and 8.0% coupon A 5-year maturity instrument carries a Php500,000 face value and 8.0% coupon Considering the current crisis, equity investors generally demand a 3.5% premium over government securities Little Lemon's estimated beta is at 1.2 1. What is the nominal risk-free rate? 2. How much is the weighted average cost of debt? Hint: Use market values of the debt instruments in determining the weight. 3. How much is the weighted average cost of capital assuming cost of debt is at 7.25% and tax rate is at 30%?
Little Lemon Co. is identifying the value of its equity using the enterprise value approach as they have never issued dividends to-date because the Company is still at its early stages. With this, they have the following available information: The government's real free rate for its debt securities is estimated at 3.5% with an estimated inflation premium of 1.5%. The target capital structure of Little Lemon is at 60% debt and 40% equity Little Lemon was able to determine that its cost of debt is estimated as: With 3 years maturity - 6.50% With 4 years maturity - 7.0% With 5 years maturity - 8.0% The following are the information about the current debts issued by Little Lemon A 3-year maturity instrument carries a Php500,000 face value and 8.0% coupon A 5-year maturity instrument carries a Php500,000 face value and 8.0% coupon Considering the current crisis, equity investors generally demand a 3.5% premium over government securities Little Lemon's estimated beta is at 1.2 1. What is the nominal risk-free rate? 2. How much is the weighted average cost of debt? Hint: Use market values of the debt instruments in determining the weight. 3. How much is the weighted average cost of capital assuming cost of debt is at 7.25% and tax rate is at 30%?
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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Question
Little Lemon Co. is identifying the value of its equity using the enterprise value approach as they have never issued dividends to-date because the Company is still at its early stages. With this, they have the following available information:
- The government's real free rate for its debt securities is estimated at 3.5% with an estimated inflation premium of 1.5%.
- The target capital structure of Little Lemon is at 60% debt and 40% equity
- Little Lemon was able to determine that its cost of debt is estimated as:
- With 3 years maturity - 6.50%
- With 4 years maturity - 7.0%
- With 5 years maturity - 8.0%
- The following are the information about the current debts issued by Little Lemon
- A 3-year maturity instrument carries a Php500,000 face value and 8.0% coupon
- A 5-year maturity instrument carries a Php500,000 face value and 8.0% coupon
- Considering the current crisis, equity investors generally demand a 3.5% premium over government securities
- Little Lemon's estimated beta is at 1.2
1. What is the nominal risk-free rate?
2. How much is the weighted average cost of debt? Hint: Use market values of the debt instruments in determining the weight.
3. How much is the weighted average cost of capital assuming cost of debt is at 7.25% and tax rate is at 30%?
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