Oliva Corporation (OC) is planning to establish a new plant to produce olive oil in Kalamata under a new company named Kalamata Oliva Corporation (KOC). OC's unlevered beta is 1.5 and the tax rate is 25%. KOC's debt-to-equity ratio is 0.5. Considering that the risk-free rate is 3% and the market return is 10%, KOC's cost of equity is: Select one: a. 17.44% b. None of the proposed answers is correct c. 10.60% d. 22.50% e. 12.87%

Oliva Corporation (OC) is planning to establish a new plant to produce olive oil in Kalamata under a new company named Kalamata Oliva Corporation (KOC). OC's unlevered beta is 1.5 and the tax rate is 25%. KOC's debt-to-equity ratio is 0.5. Considering that the risk-free rate is 3% and the market return is 10%, KOC's cost of equity is: Select one: a. 17.44% b. None of the proposed answers is correct c. 10.60% d. 22.50% e. 12.87%

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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Suppose Goodyear Tire and Rubber Company is considering divesting one of its manufacturing plants. The plant is expected to generate free cash flows of 51.54 million per year, growing at a rate of 2.4% per year. Goodyear has an equity cost of capital of 8,7%, a debt cost of capital of 6.7%, a marginal corporate tax rate of 38%, and a debt- equity ratio of 2.6. If the plant has average risk and Goodyear plans to maintain a constant debt equity ratio, what after tax amount must it receive for the plant for the divestiture to be profitable?
Adamson Corporation is considering four average-risk projects with the following costs and rates of return: Expected Rate of Return TE Project Cost 1 $2,000 16.00% 2 3,000 15.00 5,000 13.75 4 2,000 12.50 The company estimates that it can issue debt at a rate of ra = 9%, and its tax rate is 25%. It can issue preferred stock that pays a constant dividend of $7.00 per year at $56.00 per share. Also, its common stock currently sells for $41.00 per share; the next expected dividend, D1, is $4.25; and the dividend is expected to grow at a constant rate of 6% per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock. a. What is the cost of each of the capital components? Do not round intermediate calculations. Round your answers to two decimal places. Cost of debt: % Cost of preferred stock: % Cost of retained earnings: % b. What is Adamson's WACC? Do not round intermediate calculations. Round your answer to two decimal places. % c. Only projects…
Suppose your company needs $17 million to build a new assembly line. Your target debt- equity ratio is .75. The flotation cost for new equity is 10 percent, but the flotation cost for debt is only 7 percent. Your boss has decided to fund the project by borrowing money because the flotation costs are lower and the needed funds are relatively small. a. What is your company's weighted average flotation cost, assuming all equity is raised externally? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the true cost of building the new assembly line after taking flotation costs into account? (Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to the nearest whole dollar amount, e.g., 1,234,5667.) a. Flotation cost b. Amount raised %
Adamson Corporation is considering four average-risk projects with the following costs and rates of return: Project Cost Expected Rate of Return 1 $2,000 16.00% 2 3 4 3,000 5,000 2,000 15.00 13.75 12.50 The company estimates that it can issue debt at a rate of rd = 9%, and its tax rate is 25%. It can issue preferred stock that pays a constant dividend of $4.00 per year at $56.00 per share. Also, its common stock currently sells for $49.00 per share; the next expected dividend, D₁, is $5.75; and the dividend is expected to grow at a constant rate of 5% per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock. a. What is the cost of each of the capital components? Do not round intermediate calculations. Round your answers to two decimal places. % Cost of debt: Cost of preferred stock: Cost of retained earnings: % % b. What is Adamson's WACC? Do not round intermediate calculations. Round your answer to two decimal places. % c. Only projects…
Sweetness Inc. produces a line of chocolate candies and has an optimal capital structure that is 50% debt and 50% equity. Sweetness has a beta of 1.2 and is considering expanding into the appetizer business. Sweetness’ primary competition in the appetizer business has a beta of 1.5 and a 40%/60% debt/equity mix. If the risk-free rate is 7%, the market risk premium is 8.5%, and the marginal tax rate is 40%, what is the cost of the equity-financed portion of Sweetness’ new investment
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Situational Software Co. (SSC) is trying to establish its optimal capital structure. Its current capital structure consists of 30% debt and 70% equity; however, the CEO believes that the firm should use more debt. The risk-free rate, FRF, is 5%; the market risk premium, RPM, is 5% ; and the firm's tax rate is 25%. Currently, SSC's cost of equity is 15%, which is determined by the CAPM. What would be SSC's estimated cost of equity if it changed its capital structure to 50% debt and 50% equity? Do not round intermediate Round your answer to two decimal places. calculations. % 4
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Corcovado Pharmaceuticals. Corcovado Pharmaceutical’s cost of debt is 7%. The risk-free rate of interest is 3%. The expected return on the market portfolio is 8%. After effective taxes, Corcovado’s effective tax rate is 25%. Its optimal capital structure is 60% debt and 40% equity. If Corcovado’s beta is estimated at 1.1, what is its weighted average cost of capital? If Corcovado’s beta is estimated at 0.8, significantly lower because of the continuing profit prospects in the global pharma sector, what is its weighted average cost of capital?

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