RDJ Corp. has expected earnings before interest and taxes (EBIT) of $5,000 (assumed to continue forever). Itsunlevered cost of capital is 13.0% and its corporate tax rate is 35%. The company would like to borrow debt thatamounts to $2,000 and use the proceeds to buy back shares. This debt has a 7.0% annual interest rate and paysinterests annually. What is the firm's cost of equity, after this capital conversion?O A.O B.O C.O E.10.05%13.33%15.14%OD. 13.82%12.65%B1019283746Finis

The cost of equity refers to the rate of return required by speculators to compensate for the hazard…

Answered: RDJ Corp. has expected earnings before…

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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Pastel Interiors is currently an all-equity firm that has an annual projected BIT of $136,900. The current cost of equity is 16.5% and the tax rate is 20%. The firm is considering adding $118,000 of debt with a coupon rate of 7.5% to its capital structure. The debt will be sold at par value. What is the value of the unlevered firm (pre-debt)? A $763,570 B $663.758 C $730,133 (D) $696,945 ) $630,570
Duke Inc. is considering to change its capital structure of a $1 million:$3 million debt-equity mix (in terms of market values), by taking out a $3 million loan which is used to pay a large dividend to shareholders. The firm’s tax rate is 40%. After the dividend has been paid, what will be the firm’s total equity value?
Costly Corporation is considering using equity financing. Currently, the firm's stock is selling for $31.00 per share. The firm's dividend (D0) is $3.00 with constant annual growth rate of 5.0%. If the firm issues new stock, the flotation costs would equal 10.0 percent of the stock's market value. The firm's marginal tax rate is 40%. What is the firm's cost of external equity?
An all-equity firm has expected earnings of $14,200 and a market value of $82,271. The firm is planning to issue $15,000 of debt at 6.3 percent interest and use the proceeds to repurchase shares at their current market value. Ignore taxes. What will be the cost of equity after the repurchase?
Bloom Company Limited expects its EBIT to be $80,000 every year forever. The firm canborrow at 9 percent. The firm currently has no debt, and its cost of equity is 13 percent. Thetax rate is 35 percent. The firm will borrow $100,000 and use the proceeds to repurchase shares. You are required to answer the following:(a) What is the value of the unlevered firm? (b) What will be the value of firm after recapitalization? (c) What is the value of equity in the recapitalized firm? (d) What is the Weighted Cost of Capital of the levered firm?
ABC International has an unlevered cost of capital of 10 %, a tax rate of 35 %, and expected earnings before interest and taxes of $26,500. The company has $40,000 in bonds outstanding that have a 7% coupon and pay interest annually. The bonds are selling at par value. What is the cost of equity?
Rolex, Inc. has equity with a market value of $20 million and debt with a market value of $10 million. Assume the firm has no default risk and can borrow at the risk-free interest rate. The risk-free interest rate is 5 percent per year, and the expected return on the market portfolio is 11 percent. The beta of the company's equity is 1.2. The tax rate is 20%. What is the cost of capital for an otherwise identical all-equity firm?
Jenkins, Inc., has equity with a market value of $23.1 million and debt with a market value of $9.24 million. The cost of debt is 10 percent per year. Treasury bills that mature in one year yield 6 percent per year, and the expected return on the market portfolio over the next year is 11 percent. The beta of the company’s equity is 1.16. The firm pays no taxes. What is the cost of capital for an otherwise identical all-equity firm?
Lily Co. is expected to pay a dividend of $12 at the end of this year. The firm would like to issue new common stock to raise project funds but expects to incur flotation costs of 4%. The company's dividends are expected to grow at a constant rate of 6% indefinitely. Currently the stock is selling for $120. What is the after-tax cost of this firm’s equity? Assume a tax rate of 40%.
ABC is an unlevered firm with EBIT of $12,257 per year forever. Its unlevered cost of equity is 11%. It plans to borrow $36,348 perpetual debt at 6% to buy back shares. If the corporate tax is 26%, what is the firm value after the recapitalization?
National Company expects P30,000,00 in earnings next year. Its dividend payout ratio is 40%, and its equity to asset ratio is 40%. National Company uses no preferred stock. At what amount of financing will there be a break point in National Company’s cost of capital?
Jenkins, Inc., has equity with a market value of $23.1 million and debt with a market value of $9.24 million. The cost of debt is 10 percent per year. Treasury bills that mature in one year yield 6 percent per year, and the expected return on the market portfolio over the next year is 11 percent. The beta of the company's equity is 1.16. The firm pays no taxes. a. What is the company's debt-equity ratio? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the company's weighted average cost of capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g.. 32.16.) c. What is the cost of capital for an otherwise identical all-equity firm? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. Debt-equity ratio b. Weighted average cost of capital C. Cost of capital 0.40 11.29% %

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