Q22-Q23 are based on the following information: You are trying to value a private company. The company has 4 million of debt and 4 million of book equity. The ratio of market value to book value for similar firms is 2. You decide to use this ratio to estimate the market value of equity as the input for the weights in WACC calculation. The average beta for publicly traded firms in the same industry is 1.86, and the average debt-to-equity ratio for public firms in this industry is 0.4. The corporate tax rate is 40%. The risk free rate is 4% and the market risk premium is 5.5%. The interest rate for the debt is 10%. 22 What is levered beta for the private firm? a 1.5 b 1.75 c 1.95 d 2.1 2.4 c 23 What is the WACC for the private firm? a 10.02 b 11.82 с d 13.15 14.73

Q22-Q23 are based on the following information: You are trying to value a private company. The company has 4 million of debt and 4 million of book equity. The ratio of market value to book value for similar firms is 2. You decide to use this ratio to estimate the market value of equity as the input for the weights in WACC calculation. The average beta for publicly traded firms in the same industry is 1.86, and the average debt-to-equity ratio for public firms in this industry is 0.4. The corporate tax rate is 40%. The risk free rate is 4% and the market risk premium is 5.5%. The interest rate for the debt is 10%. 22 What is levered beta for the private firm? a 1.5 b 1.75 c 1.95 d 2.1 2.4 c 23 What is the WACC for the private firm? a 10.02 b 11.82 с d 13.15 14.73

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Description: Q22-Q23 are based on the following information:You are trying to value a private company. The company has 4 million of debt and 4 million of book equity.The ratio of market value to book value for similar firms is 2. You decide to use this ratio toe

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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Data for Barry Computer Co. and its industry averages follow. The firm’s debt is priced at par, so the market value of its debt equals its book value. Since dol-lars are in thousands, number of shares are shown in thousands too. a. Calculate the indicated ratios for Barry.b. Construct the DuPont equation for both Barry and the industry.c. Outline Barry’s strengths and weaknesses as revealed by your analysis.d. Suppose Barry had doubled its sales as well as its inventories, accounts receivable, andcommon equity during 2018. How would that information affect the validity of yourratio analysis? (Hint: Think about averages and the effects of rapid growth on ratios ifaverages are not used. No calculations are needed.)
In the Merton model of corporate equity which is based on the Black Scholes formula, what is the quantity (S0/KT)? Assume that interest rates are zero (r=0) so the time value of money can be ignored, therefore S0 = ST. (a) Debt-to-equity ratio. (b) Debt-to-assets ratio. (c) Assets-to-debt ratio. (d) Assets-to-equity ratio. (e) Equity-to-assets rati
Labrador technologies Inc. plans to become public soon. The board of directors would like to know the value of common equity and have asked for your opinion. The firm has $1,249,917 in preferred equity and the market value of its outstanding debt equals $2,049,396. The WACC for this firm is estimated to be 8.92%. For this example assume the current assets are zero. Use the DCF valuation model with the expected FCFs shown below; year 1 represents one year from today and so on. The company expects to grow at a 3.0% rate after Year 5. Rounding to the nearest penny, what is the value of common equity? Free Cash Period Flow Year 1 $1,370,274 Year 2 $1,761,479 Year 3 $1,909,652 Year 4 $2,361,090 Year 5 $2,744,645
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 $400,000 in equity. 2. Which company's debenture bonds are less risky based on the debt-to-equity ratio? Explain. Show your calculations to support your decision.
You are trying to estimate the beta of a private company, whose debt-to-equity ratio is 0.72. Its corporate tax rate is 30%. Its public competitor has a beta of 1.5 and no debt. Your beta estimate is
CoffeeCarts has a cost of equity of 15.1%, has an effective cost of debt of 3.8%, and is financed 69% with equity and 31% with debt. What is this firm's WACC? CoffeeCarts's WACC is __ % ? (Round to one decimal place.)
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Sinaloa Appliance, Inc., a private firm that manufactures home appliances, has hired you to estimate the company’s beta. You have obtained the following equity betas for publicly traded firms that also manufacture home appliances. ($ millions) Firm Beta Debt Market Value of Equity iRobot 0.97 $0 $ 3,390 Middleby's 1.92 771 7,570 National Presto 0.17 0 882 Newell Brands 1.12 11,958 27,070 Whirlpool 1.82 4,535 14,470 a. Estimate an asset beta for Sinaloa Appliance. (Round intermediate calculations and final answer to 3 decimal places.)
A company is considering its optimal capital structure. The firm currently has 1 million shares outstanding at $ 20 per share (tax rate = 40%) and a debt balance of $5 million. Currently, its (levered) beta is 1.5 and its ERP is 5.5%. The current risk-free rate is 5%. Your research indicate the following ratings and pre-tax cost of debt across the different debt ratios: D/(D+E) Rating Pre-tax cost of debt 0% AAA 10% 10% AA 10.5% 20% A 11% 30% BBB 12% 40% BB 13% 50% B 14% 60% CCC 16% 70% CC 18% 80% C 20% 90% D 25% a. Using the optimal WACC approach, what is the firm's optimal debt ratio? b. Calculate the company's unlevered value, assuming that the probability of default is 5% and the company loses 30% of its value in the event of a default.
4
Dickson, Inc., has a debt-equity ratio of 2.3. The firm's weighted average cost of capital is 11 percent and its pretax cost of debt is 8 percent. The tax rate is 23 percent. a. What is the company's cost of equity capital? (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 company's unlevered cost of equity capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c. What would the company's weighted average cost of capital be if the company's debt- equity ratio were .80 and 1.30? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) a. Cost of equity b. Unlevered cost of equity C. WACC if debt-equity ratio = 0.80 WACC if debt-equity ratio = 1.30 % % % % do do do do

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