noticed that your firm’s debt has an overall lower cost of capital of 5% compared to equity of 15%. Therefore, you suggested to the financial manager of your firms that they should increase it’s debt component in capital structure from 30% to 70% while reducing its equity component from 70% to 30% instead. To back your justifications, under this new arrange
Q: Lany Corporation is deciding whether to pursue a restricted or relaxed working capital investment…
A: The Fixed Assets Turnover Ratio is Activity Ratio. It is calculated with the help of following…
Q: Last year Chantler Corp. had $200,000 of assets, $20,000 of net income, and a debt-to-total-assets…
A: ROE = Net income / Shareholders equity Debt/ Total assets = 30% as given 30% = Debt/ 2,00,000 Debt =…
Q: By how much would the capital structure shift change the firm's cost of equity? a. −5.40% b.…
A: Cost of equity refers to the cost incurred by the company for issuing new equity. When a company use…
Q: Consider this case: Globex Corp. has a capital structure that consists of 35% debt and 65%…
A: Levered beta = 1.10 Debt ratio = 35% Equity ratio = 65% Tax rate = 25%
Q: Cyclone Software Co. is trying to establish its optimal capital structure. Its current capital…
A: Debt= 25% Equity= 75% Rf= 5% RPM= 6% Tax Rate= 40% Cost of equity=14% Cost of equity if it changed…
Q: Lucky Cement is trying to establish its optimal capital structure. Its current capital structure…
A: The question is based on the concept of optimal capital structure for firm based on the calculation…
Q: Ben Corporation is deciding whether to pursue a restricted or relaxed working capital investment…
A: Times Interest Earned ratio is a measure of a company abilitybto meet out its debt (Interest…
Q: Cyclone Software Co. is trying to establish its optimal capital structure. Its current capital…
A: The cost of equity is the cost of financed the funds from the equity shareholders.
Q: United Builders wants to maintain a target capital structure with 30% debt and 70% equity. Its…
A: Dividend payout ratio measures the dividend payout in relation to the net income generated by the…
Q: Dubs & Co. has a debt ratio of 0.50, a total assets turnover of 0.25, and a profit margin of 10%.…
A: Current ROE= Profir Margin×Assets Turnover×Equity Multiplier10×0.25×2=5% Lets assets be 1so debt…
Q: You work in the corporate finance division of The Home Depot and your boss has asked you to review…
A: WACC is the cost of capital of a company in which the sources of finance are weighted…
Q: An industrial firm with assets of $100 million is exploring the benefit of leveraging the balance…
A: Given: Total Assets = $100 million Return on Assets (ROA) = 9% Return on Equity (ROE) 15% Debt…
Q: You have been hired by a new firm that is just being started. The CFO wants to finance with 60%…
A: ROE FORMULA: ROE=NET INCOMESHAREHOLDER'S EQUITY
Q: Vafeas Inc.'s capital structure consists of 80% debt and 20% common equity, its beta is 1.60, and…
A: Levered Beta = 1.60 Calculating Unlevered beta Unlevered beta= Levered beta/ (1+(1-tax…
Q: HUNK Limited has hired you on as a consultant to assist with their capital budgeting. Their target…
A: WACC = (Weight of debt * after tax cost of debt) + (Weight of preferred * Cost of preferred) +…
Q: A firm with a corporatewide debt-to-equity ratio of 1:2, an after-tax cost of debt of 7%, and a cost…
A: Weighted average cost of capital (WACC) is also known as the Composite Cost of Capital or Average…
Q: Quinlan Electrical has quite a few positive NPV projects from which to choose. The problem is that…
A: The calculation of the increase in capital budget in each policy is as follows:
Q: Part 1-Sayote Corporation is considering changing its capital structure in order to lower its cost…
A: Required: The estimated cost of equity of Sayote Corp with the new capital structure. Estimate the…
Q: Cyclone Software Co. is trying to establish its optimal capital structure. Its current capital…
A:
Q: a. What is Ambeon's weighted average cost of capital? b. If Ambeon's stock price were to rise such…
A: Weighted average cost of capital capital can be defined as average rate of return from all the…
Q: You are hired as a consultant to Giambono Company, whose target capital structure is 40% debt, 15%…
A: WACC:The weighted average cost of capital (WACC) is a measure of the cost of capital of a business…
Q: Gator Fabrics Inc. currently has zero debt (i.e., wd = 0). It is a zero growth company, and…
A: Weighted Average Cost of Capital (WACC) is equal to the cost of equity in case of a zero-debt…
Q: e is 30%. If the company follows a restricted policy, its total asset turnover will be 2.4. Under
A: Given as, The Fixed Assets Turnover Ratio is Activity Ratio. Fixed Assets Turnover Ratio as, =…
Q: Smith and T Co. currently is financed with 10% debt and 90% equity. However, its CFO has proposed…
A: The company has issued the new long-term debt, which means the company has taken more loans and has…
Q: dividends
A: Formula to calculate the increase in dividend is: Dividend of new capital budget - Dividend of…
Q: Rowe and Company has a debt ratio of 0.50, a total assets turnover of 0.25, and a profit margin of…
A: Answer current ROE=profit margin×Asset turnover×Equity multiplier =10×0.25×2…
Q: Charter Enterprises currently has $1.5 million in total assets and is totally equity financed. It is…
A: The capital structure of the company generally consists of some portion of debt and a balanced…
Q: LCG Distribution Company is in the process of setting its target capital structure. The CFO believes…
A: Capital structure is the mix of debt and equity which is used to finance the firm's assets. The cost…
Q: Albrecht Inc. is a no-growth firm whose sales fluctuate seasonally, causing total assets to vary…
A: Given fixed assets is constant. That is $260,000. From above only current assets are fluctuating.…
Q: Part 1-Sayote Corporation is considering changing its capital structure in order to lower its cost…
A: Calculation of Sayote Corp,'s beta using CAPM: Cost of equity=Risk free rate+Beta×Market risk…
Q: Seattle Health Plans currently uses zero-debt financing. Its operating profit is $1 million, and it…
A: Capital structure can be defined as the structure that depicts the proportion of debt and equity…
Q: Perseverance Corporation is deciding whether to pursue a restricted or relaxed current investment…
A: The net income is impacted by the working capital and there is impact of working capital on return…
Q: Suppose that your company’s weighted-average cost of capital is 9 percent. Your company is planning…
A: IRR is a capital budgeting technique that is used to estimate the profitability of potential…
Q: You were hired as a consultant to Giambono Company, whose target capital structure is 40% debt, 15%…
A: In this question we need to compute the WACC i.e. weighted average cost of capital.
Q: 7.5%. A project has been proposed to create a new business line, and your manager asks you to…
A: Cost of equity is the effective cost incurred by company for using equity as source of finance. WACC…
Q: You have been hired by a new firm that is just being started. The CFO wants to finance with 60%…
A: The weightage of debt in the capital structure affects the net income of the firm and thus affects…
Q: A firm has two independent projects, each requiring investment of INR 3 million, but each of these…
A: Residual dividend policy is the policy in which the earnings of the company are first used for the…
Q: Dairy Isle has a value of $59,000 in a good economy and $48,000 in a recession. The firm has $50,000…
A: Current value of firm: In good economy=$59,000 In recession=$48,000 Amount of debt=$50,000 Value of…
Q: You are comparing two possible capital structures for a firm. The first option is an all-equity…
A: Option (A) whenever EBIT exceeds $428,000 is the correct answer.
Q: Wintermelon Corp.'s controller is considering a change in the capital structure consisting of 40%…
A: Beta is the measure of stock’s volatility in relation to the overall market.
Q: The ROA of your firm is 5%. The firm also has a debt-asset ratio of 70%. If your firm reinvests 100%…
A: Calculating the value of internal growth rate. We have,Internal Growth Rate = ROA X RR / (1 – ROA X…
Q: firm has zero debt in its capital structure. Its overall cost of capital is 10%. The firm is…
A: Weighted average cost of capital = (weight of Debt * Cost of debt) + (weight of Equity * Cost of…
Q: An outside consultant has suggested that because debt is cheaper than equity, the firm should switch…
A: Weighted average cost of capital is calculated as: = (Weight of Debt * After tax cost of debt) +…
Q: What would be FFC’s estimated cost of equity if it changed its capital structure to 40% debt and 60%…
A: Given optimal capital structure = 25% debt and 75% equity risk free rate = 4% market risk premium =…
Q: Companies that use debt in their capital structure are said to be using financial leverage. Using…
A: Since you have posted a question with multiple sub-parts, we will solve first three sub-parts for…
Q: Horizon Corporation has decided to a capital restructuring. This process of restructuring involves…
A: The increased financial leverage will increase EPS. Under the old capital structure, the interest…
You noticed that your firm’s debt has an overall lower cost of capital of 5% compared to equity of 15%. Therefore, you suggested to the
i) Calculate, what would be the new cost of debt?
ii) With this new arrangement, did you managed to reduce the overall cost of capital?
![](/static/compass_v2/shared-icons/check-mark.png)
Step by step
Solved in 3 steps with 2 images
![Blurred answer](/static/compass_v2/solution-images/blurred-answer.jpg)
- An outside consultant has suggested that because debt is cheaper than equity, the firm should switch to a capital structure that is 50 percent debt and 50 percent equity. Under this new and more debt-oriented arrangement, the aftertax cost of debt is 9.00 percent, and the cost of common equity (in the form of retained earnings) is 17.00 percent. b. Recalculate the firm's weighted average cost of capital. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) Debt Common equity Weighted average cost of capital Weighted Cost % 0.00 %The Problem After completing her estimate of Templeton's WACC, the CFO decided to explore the possibility of adding more low- cost debt to the capital structure. With the help of the firm's investment banker, the CFO learned that Templeton could probably push its use of debt to 37.5% of the firm's capital structure by issuing more debt and retiring (purchasing) the firm's preferred shares. This could be done without increasing the firm's costs of borrowing or the required rate of return demanded by the firm's common stockholders. What is your estimate of the WACC for Templeton under this new capital structure proposal?You are an analyst in the Finance department at a conglomerate, where the CFO believes the cost of equity is 10% and the WACC is 7.5%. A project has been proposed to create a new business line, and your manager asks you to calculate the NPV assuming the project is funded entirely by equity. Should you discount the CF’s using a) 10%, b) 7.5% or c) some other rate? Why?
- Gnomes R Us is considering a new project. The company has a debt-equity ratio of .72. The company’s cost of equity is 14.7 percent, and the aftertax cost of debt is 8 percent. The firm feels that the project is riskier than the company as a whole and that it should use an adjustment factor of +2 percent. a. What is the company’s WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What discount rate should the firm use for the project? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)Consider the setting of Problem 18. You decided to look for other comparables to reduce estimation error in your cost of capital estimate. You find a second firm, Thurbinar Design, which is also engaged in a similar line of business. Thurbinar has a stock price of $20 per share, with 15 million shares outstanding. It also has $100 million in outstanding debt, with a yield on the debt of 4.5%. Thurbinar’s equity beta is 1.00. (1) Assume Thurbinar’s debt has a beta of zero. Estimate Thurbinar’s unlevered beta. Use the unlevered beta and the CAPM to estimate Thurbinar’s unlevered cost of capital. (2) Estimate Thurbinar’s equity cost of capital using the CAPM. Then assume its debt cost of capital equals its yield, and using these results, estimate Thurbinar’s unlevered cost of capital. (3) Explain the difference between your estimates in part (1) and part (2). (4) You decide to average your results in part (1) and part (2), and then average this result with your estimate from Problem 18.…Your boss, whose background is in financial planning, is concerned about the company's high weighted average cost of capital (WACC) of 25.00%. He has asked you to determine what combination of debt-equity financing would lower the company's WACC to 14.00%. If the cost of the company's equity capital is 6% and the cost of debt financing is 30.00%, what debt-equity mix would you recommend? (Round the final answers to three decimal places.) The debt-equity mix should be % debt and % equity financing.
- As the general manager of a firm, you are presented with an investment proposal from one of your divisions. Its net present value, if discounted at the cost of capital for your firm (which is 15 percent), is $ 1 00,000, and its internal rate of return is 20 percent. (a) What are the economic interpretations of the net present value and internal rate of return figures? In other words, what do they mean? (b) What, if any, additional information would you like to have before approving the project?According to Modigliani & Miller Theory (M&M), WACC of the firm is not affected by the capital structure. Changes of capital structure weights is offset by the change in the cost of equity, given the following information, Required return on assets = 16% Cost of debt = 10% Percent of debt = 45% Calculate: Cost of equity. The debt-to-equity ratio. Suppose the cost of equity is 25%. Percent of equity in the firm.Gnomes R Us is considering a new project. The company has a debt-equity ratio of .86. The company's cost of equity is 14.6 percent, and the aftertax cost of debt is 7.9 percent. The firm feels that the project is riskier than the company as a whole and that it should use an adjustment factor of +3 percent. a. What is the company's WACC? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. b. What discount rate should the firm use for the project? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. a. WACC b. Project discount rate %
- You are considering two identical firms one levered the other not. Both firms have expected EBIT of $600. The value of the unlevered firm (vU) is $2000. The corporate tax rate (t) is 30%. The cost of debt (rD) is 10%, and the ratio of debt to equity (D/E) is 1 for the levered firm. (a) Calculate the cost of equity for both the levered (rL) and unlevered firms (rU). (b) Calculate the weighted average cost of capital for each firm. (c) Why is the cost of equity higher for the levered firm, but the WACC lower? (d) In an MM world without taxes, what is the optimal capital structure?.Scanlon Inc.'s CFO hired you as a consultant to help her estimate the cost of capital. You have been provided with the following data: rRF = 4.10%; RPM = 5.25%; and b = 0.70. Based on the CAPM approach, what is the cost of equity?You are analyzing the cost of capital for a firm that is financed with 65 percent equity and 35 percent debt.The cost of debt capital is 8 percent, while the cost of equity capital is 20 percent for the firm. What is the overall cost of capital for the firm? Select one: a. 20.2 % b. 15.8 % c. 12.2 % d. None of these
![EBK CONTEMPORARY FINANCIAL MANAGEMENT](https://www.bartleby.com/isbn_cover_images/9781337514835/9781337514835_smallCoverImage.jpg)
![EBK CONTEMPORARY FINANCIAL MANAGEMENT](https://www.bartleby.com/isbn_cover_images/9781337514835/9781337514835_smallCoverImage.jpg)