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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MacG, Inc. has an equity market capitalization of $7,800,000. Its equity beta is 4.2. The risk-free rate and market return are expected to be 1.4% and 7.2%, respectively. MacG also has 3,500,000 in bonds that have a yield-to-maturity of 5.4%. If MacG faces a tax rate of 14%, which is the weighted average cost of capital for MacG? Edit View Insert Format Tools Table 12pt ✓ Paragraph В І U Al А ✓ T² V 20 ► V :
Southern Corporation has a capital structure of 40% debt and 60% common equity. This capital structure is expected not to change. The firm's tax rate is 34%. The firm can issue the following securities to finance capital investments: Debt: Capital can be raised through bank loans at a pretax cost of 9.1%. Also, bonds can be issued at a pretax cost of 8.5%. Common Stock: Retained earnings will be available for investment. In addition, new common stock can be issued at the market price of $80. Flotation costs will be $5 per share. The recent common stock dividend was $4.00. Dividends are expected to grow at 3% in the future. What is the cost of external equity? PLEASE INPUT THE ANSWER IN PERCENT ROUNDING IT TO 2 DECIMALS. DO NOT INCLUDE % SIGN, E.G., INSTEAD OF 9.99% INPUT 9.99
Corporate Finance Consider a company where the market value of debt and equity are 25% and 75%,respectively of total Enterprise Value. The company’s debt yields 200bps over the risk free interest rate of 5.25%. The company’s tax rate is 21%. The beta of the company’s stock is 1.2. Assuming the equity risk premium is 4.5%, what is the company’s after-tax WACC?
Assume that Amazon is also considering investing in the carwash business. In terms of capital structure, Amazon and Spffiy have a similar level of debt -- let's assume that their capital structure (% of debt vs. % of market value of equity) is identical. The Beta for Spffiy stock is 0.54. The Beta for Amazon's stock Is 1.81. Based on this information please answer the following: 1) Which company, Spiffy or Amazon, would you assume (based on the above) to have a lower WACC? Why? 2) Based on your answer to question 1, based on the NPV tool, to which company would investment in the carwash business look more attractive. 3) Does it make sense for bothSpiffy and Amazon to use their company wide WACC to evaluate an investment in the carwash business? Why or why not?
You plan to purchase debenture bonds from one of two companies in the same industry that are similar in size and performance. The first company has $800,000 in total liabilities, and $1,200,000 in equity. the second company has $600,000 in total liabilities, and $400,000 in equity. 2. Which company's debenture bonds are less risky based on the debt-to-equity ratio? Explain. Show your calculations to support your decision.
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.
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.)
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CO A has cash flows of $0.76 per share, earnings of $1.25 per share and 115,000 shares outstanding. Co B. is a comparable public company with a price of $60 per share, cash flows of $2.14 per share, and 510,000 shares outstanding. If Co Bis a sufficiently comparable company, what do you estimate Co B. price per share to be? Assume: Risk free rate 4% Market risk premium 7% Cost of debt 4%, beta of debt is 0. Tax rate 23%
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.)
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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