North Pole Fishing Equipment Corporation and South Pole Fishing Equipment Corporation would have identical equity betas of 1.08 if both were all equity financed. The market value information for each company is shown here: Debt Equity North Pole South Pole $2,930,000 $3,840,000 $3,840,000 $ 2,930,000 The expected return on the market portfolio is 11 percent and the risk-free rate is 3.1 percent. Both companies are subject to a corporate tax rate of 23 percent. Assume the beta of debt is zero.

North Pole Fishing Equipment Corporation and South Pole Fishing Equipment Corporation would have identical equity betas of 1.08 if both were all equity financed. The market value information for each company is shown here: Debt Equity North Pole South Pole $2,930,000 $3,840,000 $3,840,000 $ 2,930,000 The expected return on the market portfolio is 11 percent and the risk-free rate is 3.1 percent. Both companies are subject to a corporate tax rate of 23 percent. Assume the beta of debt is zero.

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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Having successfully issued their preference shares, Micron Industries is seeking to determine its Weighted Average Cost of Capital, so that it can be used as the company’s required return in evaluating upcoming capital projects. Utilising information from Micron Industries’ financial statements, presented on page 1, together with current information, the company has the following capital structure: Debt: Bonds outstanding has a face value of $90,000,000, currently selling at 98% of par. The coupon rate on these bonds is 9% paid semi-annually and there is 12 years left to maturity. (Hint: you can use the lowest multiple of $1,000 for the YTM calculation only) Common stock: 144,000,000 shares of common stock outstanding with a market price of $27.30. Preferred stock: 100,000,000 shares of preferred shares outstanding with a market price of $60. The annual dividend is $4.50.Page 4 of 6 Additional Information:  The Company’s tax rate is 35%.  The current risk free rate is 3.50%; The…
b) Calculate the cost of preferred shares for Y capital structure.
Company Zero is a non-listed private company with total equity of P10 million and debt of P4.5 million. The tax rate is 30%, risk-free rate is 6%. Company One is a publicly listed company which is in the same industry, product line and risk profile as Company Zero. It has a beta of 1.5, equity of P15 million and total debt of P6 million. Tax rate is 35%. The expected return of on a market portfolio is 12% and the risk-free return is 8%. a. Compute the beta for Company Zero. b. Compute the risk premium and the required return for Company One market portfolio.
Orange Company was contemplating two (2) capital structure choices. The CFO should choose the optimal capital structure that the company must implement; this decision should maximize the stock price. To do so, the CFO must first perform calculations using data obtained from the company: Plan Alpha 20% debt & 80% equity Wd=20%, Wc= 80% Cost of debt (rd)= 12% Tax rate= 30% bL=1.2 Risk Premium (RP)=4% Risk-free rate (rf)= 6% rs=? WACC=? Plan Omega 30% debt & 70% equity Wd=30%, Wc= 70% Cost of debt(rd)= 10% Tax rate= 30% bL=1.5 Risk Premium (RP)=5% Risk-free rate (rf)= 8% rs=? WACC=? *Hint: Compute for the rs first before computing the WACC.
Orion is financed with 26% debt and the rest equity. Orion has an equity beta of 1.2, a debt beta of 0 and a marginal tax rate of 26%.If Orion issues debt to repurchase equity so that the new firm is now 52% debt, what will be its new equity beta? (Continue to assume the debt beta remains at 0.)
Do not use chatgpt.
The asking price for the property is $1,330,000; rents are estimated at $170,240 during the first year and are expected to grow at 2.5 percent per year thereafter. Vacancies and collection losses are expected to be 10 percent of rents. Operating expenses will be 35 percent of effective gross income. A fully amortizing 70 percent loan can be obtained at 6 percent interest for 30 years (total annual payments will be monthly payments × 12). The property is expected to appreciate in value at 2 percent per year and is expected to be owned for five years and then sold. The building represents 85 percent of value and would be depreciated over 39 years (use 1/39 per year, except year 1 depreciation is also multiplied by 11.5 / 12 to adjust for the mid month convention). The potential investor indicates that she is in the 37 percent tax bracket. Capital gains from price appreciation will be taxed at 20 percent and depreciation recapture will be taxed at 25 percent. What is the investor’s…
Estimating Components of both WACC and DDMAn analyst estimates the cost of debt capital for Abbott Laboratories is 3.0% and that its cost of equity capital is 5.0%. Assume that ABT’s statutory tax rate is 21%, the risk-free rate is 2.1%, the market risk premium is 5%, the ABT market price is $84.10 per common share, and its dividends are $1.28 per common share.(a) Compute ABT’s average pretax borrowing rate and its market beta. (Round your answers to one decimal place.) Average borrowing rate = Market beta = (b) Assume that its dividends continue at the current level in perpetuity. Use the constant perpetuity dividend discount model to infer the market's expected cost of equity capital. (Hint: Use Price per share = Dividends per share/Cost of equity capital.) (Round your answer to one decimal place.)
Trapper Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 180,000 shares of stock outstanding. Under Plan II, there would be 130,000 shares of stock outstanding and $2.27 million in debt outstanding. The interest rate on the debt is 8 percent and there are no taxes. a. Use M&M Proposition I to find the price per share. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the value of the firm under each of the two proposed plans? (Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.) a. Share price b. All-equity firm value Levered plan firm value
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%.)

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