P9-20 Weighted average cost of capital (WACC) Tack Laser Ltd., a high-end medical equipment manufacturer, is trying to decide whether to revise its target capital structure. Currently, it targets a structure with 40% debt, but it is considering a target capital structure with 60% debt. Tack Laser currently has an 8% after-tax cost of debt and a 14% cost of common stock. The company does not have any other stock or debt outstanding. a. What is Tack Laser's current WACC? b. Assuming that its cost of debt and equity remain unchanged, what will be Laser Tack's WACC under the revised target capital structure? c. Do you think that shareholders are affected by the increase in debt to 60%? If so, how are they affected? Are their common stock claims riskier now?

P9-20 Weighted average cost of capital (WACC) Tack Laser Ltd., a high-end medical equipment manufacturer, is trying to decide whether to revise its target capital structure. Currently, it targets a structure with 40% debt, but it is considering a target capital structure with 60% debt. Tack Laser currently has an 8% after-tax cost of debt and a 14% cost of common stock. The company does not have any other stock or debt outstanding. a. What is Tack Laser's current WACC? b. Assuming that its cost of debt and equity remain unchanged, what will be Laser Tack's WACC under the revised target capital structure? c. Do you think that shareholders are affected by the increase in debt to 60%? If so, how are they affected? Are their common stock claims riskier now?

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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Hw.16. Blue Angel, Inc., a private firm in the holiday gift industry, is considering a new project. The company currently has a target debt–equity ratio of .45, but the industry target debt–equity ratio is .40. The industry average beta is 1.30. The market risk premium is 8 percent, and the risk-free rate is 6 percent. Assume all companies in this industry can issue debt at the risk-free rate. The corporate tax rate is 35 percent. The project requires an initial outlay of $676,000 and is expected to result in a $96,000 cash inflow at the end of the first year. The project will be financed at the company’s target debt–equity ratio. Annual cash flows from the project will grow at a constant rate of 6 percent until the end of the fifth year and remain constant forever thereafter. Calculate the NPV of the project.
Various capital structures Charter Enterprises currently has $1.7 million in total assets and is totally equity financed. It is contemplating a change in its capital structure. Compute the amount of debt and equity that would be outstanding if the firm were to shift to each of the following debt ratios: 10%, 20%, 30%, 40%, 50%, 60%, and 90%. (Note: The amount of total assets would not change.) Is there a limit to the debt ratio's value? Calculate the capital structure below: (Round to the nearest dollar.) Equity Debt Ratio 10% $ Debt $ C
man.2
F. Pierce Products Inc. is considering changing its capital structure. F. Pierce currently has no debt and no preferred stock, but it would like to add some debt to take advantage of the tax shield. Its investment banker has indicated that the pre-tax cost of debt under various possible capital structures would be as follows: Market Debt-to Equity Ratio (D/S) 0.00 0.1111 0.2500 0.4286 0.6667 Market Equity-to- Value Ratio (ws) 1.0 0.90 6.0% 6.4 0.80 7.0 8.2 0.70 0.60 10.0 F. Pierce uses the CAPM to estimate its cost of common equity, rs, and at the time of the analaysis the risk-free rate is 6%, the market risk premium is 8%, and the company's tax rate is 25%. F. Pierce estimates that its beta now (which is "unlevered" because it currently has no debt) is 0.7. Based on this information, what is the firm's optimal capital structure, and what would be the weighted average cost of capital at the optimal capital structure? Do not round intermediate calculations. Round your answers to two…
Do not provide solution in imge format. and also do not provide plagarised content otherwise i dislike. Consider a firm with an EBIT of $865,000. The firm finances its assets with $2,650,000 debt (costing 7.9 percent and is all tax deductible) and 550,000 shares of stock selling at $6.00 per share. To reduce the firm's risk associated with this financial leverage, the firm is considering reducing its debt by $1,000,000 by selling an additional 350,000 shares of stock. The firm's tax rate is 21 percent. The change in capital structure will have no effect on the operations of the firm. Thus, EBIT will remain at $865,000. Calculate the change in the firm's EPS from this change in capital structure. Note: Do not round intermediate calculations and round your final answers to 2 decimal places. EPS before EPS after Difference
American Exploration, Inc., a natural gas producer, is trying to decide whether to revise its target capital structure. Currently it targets a 50-50mix of debt and equity, but it is considering a target capital structure with 90% debt. American Exploration currently has 7% after-tax cost of debt and a 14% cost of common stock. The company does not have any preferred stock outstanding. a. What is American Exploration's current WACC? b. Assuming that its cost of debt and equity remain unchanged, what will be American Exploration's WACC under the revised target capital structure? c. Do you think shareholders are affected by the increase in debt to 90%? If so, how are they affected? Are the common stock claims riskier now?
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A5 6e DEF Company is comparing three different capital structures. Plan A is an all-equity plan and would result in 1000 shares of stock. Plan B would result in 700 shares of stock and $13,500 in debt. Plan C would result in 800 shares of stock and $9000 in debt. The firm’s EBIT will be $10,000 per year until infinity. The interest rate on the debt is 12%. e. Ignoring taxes, what is the break-even EBIT that will cause the EPS on Plan B to be equal to the EPS on Plan C?
13.
Cecil Corporation is thinking about constructing a new facility. The company has usually distributed its earnings in the form of dividends. Common stock has typically been issued to finance capital expansion. Preferred stock and debt are not in the capital structure. (see the attached picture for the problem)

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