Spam Corp. is financed entirely by common stock and has a beta of 1.0. The firm is expected to generate aevel, perpetual stream of earnings and dividends. The stock has a price-earnings ratio of 8 and a cost ofequity of 12.5%. The company's stock is selling for $50. Now the firm decides to repurchase half of its sharesand substitute an equal value of debt. The debt is risk-free, with a 5% interest rate. The company is exemptfrom corporate income taxes. Assuming MM are correct, calculate the following items after the refinancing:a. The cost of equityb. The overall cost of capital (WACC)

The cost of capital refers to the overall rate of return that a company must earn on its investments…

pam Corp. is financed entirely by common stock and has a beta of 1.0. The firm is expected to generate a evel, perpetual stream of earnings and dividends. The stock has a price-earnings ratio of 8 and a cost of equity of 12.5%. The company's stock is selling for $50. Now the firm decides to repurchase half of its share and substitute an equal value of debt. The debt is risk-free, with a 5% interest rate. The company is exempt from corporate income taxes. Assuming MM are correct, calculate the following items after the refinancing: a. The cost of equity b. The overall cost of capital (WACC)

pam Corp. is financed entirely by common stock and has a beta of 1.0. The firm is expected to generate a evel, perpetual stream of earnings and dividends. The stock has a price-earnings ratio of 8 and a cost of equity of 12.5%. The company's stock is selling for $50. Now the firm decides to repurchase half of its share and substitute an equal value of debt. The debt is risk-free, with a 5% interest rate. The company is exempt from corporate income taxes. Assuming MM are correct, calculate the following items after the refinancing: a. The cost of equity b. The overall cost of capital (WACC)

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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Prokter and Gramble (PKGR) has historically maintained a debt-equity ratio of approximately 0.16. Its current stock price is $45 per share, with 2.3 billion shares outstanding. The firm enjoys very stable demand for its products, and consequently it has a low equity beta of 0.4 and can borrow at 4.0%, just 20 basis points over the risk-free rate of 3.8%. The expected return of the market is 9.6%, and PKGR's tax rate is 22%. a. This year, PKGR is expected to have free cash flows of $5.5 billion. What constant expected growth rate of free cash flow is consistent with its current stock price? b. PKGR believes it can increase debt without any serious risk of distress or other costs. With a higher debt-equity ratio of 0.4, it believes its borrowing costs will rise only slightly to 4.3%. If PKGR announces that it will raise its debt-equity ratio to 0.4 through a leveraged recap, determine the increase or decrease in the stock price that would result from the anticipated tax savings. a. This…
You were hired as a consultant to XYZ Company, whose target capital structure is 32% debt, 10% preferred, and 58% common equity. The interest rate on new debt is 8.40%, the yield on the preferred is 5.85%, the cost of common from retained earnings is 13.20%, and the tax rate is 33.00%. The firm will not be issuing any new common stock. What is XYZ's WACC?
Rollins Corporation is estimating its WACC. Its target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Rollins' beta is 1.2 , the risk-free rate is 5 percent, and the market risk premium is 5 percent. Rollins is a constant-growth firm which just paid a dividend of $2.00, sells for $32 per share, and has a growth rate of 5 percent. The firm's policy is to use a risk premium of 5 percentage points when using the bond-yield-plus-risk-premium method to find rs. The firm's marginal tax rate is 32 percent.What is Rollins cost of equity when using the DCF approach? Express your answer in percentage (without the % sign) and round it to two decimal places
Astromet is financed entirely by common stock and has a beta of 1.50. The firm pays no taxes. The stock has a price-earnings multiple of 14.0 and is priced to offer a 10.6% expected return. The company decides to repurchase half the common stock and substitute an equal value of debt. Assume that the debt yields a risk-free 4.2%. Calculate the following: Required: a. The beta of the common stock after the refinancing b. The required return and risk premium on the common stock before the refinancing c. The required return and risk premium on the common stock after the refinancing d. The required return on the debt e. The required return on the company (i.e., stock and debt combined) after the refinancing If EBIT remains constant: f. What is the percentage increase in earnings per share after the refinancing? g-1. What is the new price-earnings multiple? g-2. Has anything happened to the stock price? Complete this question by entering your answers in the tabs below. Req A to E Req F to G2…
The DW Media Group has an equity beta of 1.2 and 50% debt (debt over firm value) in its capitalstructure. The company has risk-free debt that costs 4% before taxes, and the expected rate of returnof the stock market is 12%. DW is considering the acquisition of a new project in publishing businessthat is expected to yield 20% on after-tax operating cash flow. Penguin Publishing House, which hasthe same business model (and risk class) as the project being considered, has an equity beta of 1.5 andhas no debt in its capital structure. Assume that the marginal tax rate for both companies is 40%.1. What is the cost of capital of Penguin Publishing House?2. If DW finances the new publishing project with 50% debt, what is the cost of capital of thisproject?3. Under the estimated cost of capital, should DW take the project or not?
Machinal Corp. is an all-equity firm with 22,000 shares of stock outstanding with a market price of $27 a share. The current cost of equity is 12 percent, and the tax rate is 21 percent. The firm is considering adding $225,000 of debt with a coupon rate of 6.25 percent to its capital structure. The debt will sell at par. What will be the levered value of the equity? Also, briefly discuss the important concept of leverage to a company.
A firm has equity with market value $100 million and debt with market value at $70 million. The debt pays perpetual expected coupons of $3.5 million annually. The above numbers are prior to a stock buyback being announced. The firm uses some of its cash buyback stock on of $20 million. As a result of the fall in its cash, the expected coupon payment to debt reduce to $3.4 million (expected payments is the probability weighted future coupons, and the probability that in some future states of the world the firm would default has increased due to the the stock buyback). Also the rate of discount Rd for expected coupons paid to debt rises to 5.35%. Assume Modigliani-Miller is true (which also means there are no taxes). What will be the value of Equity after the stock buyback? (Do not include the $20 million that is paid to the Equity holders.)
A firm has two independent projects, each requiring investment of INR 3 million, but each of these have different risk profiles, i.e., different costs of capital as below: Project A 17%, Project B 7% IRRs for A and B are 20% and 9% respectively. The firm would maintain a 30:70 debt-equity ratio and expects its net income to be 6 million INR. If this firms maintains a residual dividend policy (all cash distributed as dividends), what will be the pay-out ratio for this firm?
Optimist Company can sell common shares at $30 per share and can obtain debt funding at 8 percent. It has a marginal income tax rate of 25 percent. The yield on US Treasury securities is 3 percent. The market risk premium is 6.0 percent, and the firm's beta is 0.9. It has a targeted debt-to-equity ratio of 1:1. What is its after-tax cost of debt? Maximum number of characters (including HTML tags added by text editor): 32,000 Show Rich-Text Editor (and character count)
XYZ Corp. has bonds outstanding with a coupon rate of 2% and a YTM of 5.7%. The risk - free rate of return is 2.2% and the market is returning 10.0%. The stock has a beta of 0.9 and the firm is financed with 45% debt and 55% equity. If the tax rate is 24%, what is XYZ's WACC?
Hawar International is a shipping firm with a current share price of $4.50 and 10 million shares outstanding. Suppose Hawar announces plans to lower its corporate taxes by borrowing $10 million and repurchasing shares. a. With perfect capital markets, what will the share price be after this announcement? b. Suppose that Hawar pays a corporate tax rate of 40%, and that shareholders expect the change in debt to be permanent. If the only imperfection is corporate taxes, what will the share price be after this announcement? c. Suppose the only imperfections are corporate taxes and financial distress costs. If the share price rises to $4.55 after this announcement, what is the PV of financial distress costs Hawar will incur as the result of this new debt? Question content area bottom Part 1 a. With perfect capital markets, what will the share price be after this announcement? With perfect capital markets, the share price will be $enter your response here per share
A firm is currently an all equity firm that has 510,000 shares of stock outstanding with a market price of $53.60 a share. The current cost of equity is 10.5 percent and the tax rate is 25 percent. The firm is considering adding $7.10million of debt with a coupon rate of 6 percent to its capital structure. The debt will be sold at par value. What is the levered value of the equity ?

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