Review this situation: Universal Exports Inc. is trying to identify its optimal capital structure. Universal Exports Inc. has gathered the followingfinancial information to help with the analysis.Debt Ratio Equity Ratio70%30%40%60%50%50%60%40%70%30%T6.02%Consider this case:4₂9.40%6.75% 9.750%7.15% 10.60% 10.02%7.55%11.30% 10.78%8.24% 12.80% 11.45%WACC9.71%9.55%Which capital structure shown in the preceding table is Universal Exports Inc.'s optimal capital structure?O Debt ratio- 70%; equity ratio -30%O Debt ratio-60%; equity ratio- 40%O Debt ratio-30%; equity ratio = 70%O Debt ratio 50%; equity ratio 50%O Debt ratio-40%; equity ratio- 60%Globex Corp. is an all-equity firm, and it has a beta of 1. It is considering changing its capital structure to 65% equity and 35% debt.The firm's cost of debt will be 6%, and it will face a tax rate of 25%What will Globex Corp.'s beta be if it decides to make this change in its capital structure?Now consider the case of another company1.401.611.26US Robotics Inc. has a current capital structure of 30% debt and 70% equity. Its curre 1.47-tax cost of debt is 6%, and its tax rateis 25%. It currently has a levered beta of 1.10. The risk-free rate in 35% Now consider the case of another company:US Robotics Inc. has a current capital structure of 30% debt and 70 % equity. Its current before-tax cost of debt is 6%, and its tax rateis 25%. It currently has a levered beta of 1.10. The risk-free rate is 3.5%, and the risk premium on the market is 7.5%. US RoboticsInc. is considering changing its capital structure to 60% debt and 40% equity. Increasing the firm's level of debt will cause its before-tax cost of debt to increase to 8%.First, solve for US Robotics Inc.'s unlevered beta.Use US Robotics Inc.'s unlevered beta to solve for the firm's levered beta with the new capital structure.Use US Robotics Inc.'s levered beta under the new capital structure, to solve for its cost of equity under the new capital structure.What will the firm's weighted average cost of capital (WACC) be if it makes this change in its capital structure?7.21%O 6.18 %10.30%O 8.24%

According to bartleby guidelines , if multiple questions are asked , then 1st question needs to be…

Review this situation Universal Exports Inc. is trying to identify its optimal capital structure. Universal Exports Inc. has gathered the following financial information to help with the analysis. Debt Ratio Equity Ratio 30% 70% 40% 60% 50% 60% 70% 50% 40% 30% WACC 6.02% 9.40% 9.71% 6.75% 9.750% 9.55% 7.15% 10.60% 10.02% 7.55% 11.30% 8.24% 12.80% 10.76% 11.45% Which capital structure shown in the preceding table is Universal Exports Inc.'s optimal capital structure? O Debt ratio -70%; equity ratio -30% O Debt ratio- 60%; equity ratio- 40% O Debt ratio-30%; equity ratio- 70% O Debt ratio 50%; equity ratio 50% O Debt ratio 40%; equity ratio- 60%

Review this situation Universal Exports Inc. is trying to identify its optimal capital structure. Universal Exports Inc. has gathered the following financial information to help with the analysis. Debt Ratio Equity Ratio 30% 70% 40% 60% 50% 60% 70% 50% 40% 30% WACC 6.02% 9.40% 9.71% 6.75% 9.750% 9.55% 7.15% 10.60% 10.02% 7.55% 11.30% 8.24% 12.80% 10.76% 11.45% Which capital structure shown in the preceding table is Universal Exports Inc.'s optimal capital structure? O Debt ratio -70%; equity ratio -30% O Debt ratio- 60%; equity ratio- 40% O Debt ratio-30%; equity ratio- 70% O Debt ratio 50%; equity ratio 50% O Debt ratio 40%; equity ratio- 60%

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

See similar textbooks

Similar questions

Calculation of individual costs and WACC Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following weights: 40% long-term debt, 10% preferred stock, and 50% common stock equity (retained earings, new common stock, or both). The firm's tax rate is 24%. Debt The firm can sell for $1000 a 11-year, $1,000-par-value bond paying annual interest at a 12.00% coupon rate. A flotation cost of 4% of the par value is required. Preferred stock 8.50% (annual dividend) preferred stock having a par value of $100 can be sold for $98. An additional fee of $3 per share must be paid to the underwriters. Common stock The firm's common stock is currently selling for $80 per share. The stock has paid a dividend that has gradually increased for many years, rising from $2.25 ten years ago to the $4.43 dividend payment, Do. that the company just recently…
URGENT PLEASE d. Calculate the firm's weighted average cost of capital using the capital structure weights shown in the following table . (Round answer to the nearest 0.01%)
Hamada equation Original % debt in capital structure, wd Original % common equity in capital structure, wc Risk-free rate, TRF Market risk premium, RPM Tax rate, T Firm's cost of equity, rs Calculation of firm's current beta: Firm's current beta, b Calculation of firm's unlevered beta: Firm's unlevered beta, bu New % of debt in capital structure, Wd New New % of common equity in capital structure, Wc New Calculation of firm's new beta: Firm's new beta, bL New Calculation of firm's new cost of equity: Firm's new cost of equity, rs New 30.00% 70.00% 5.00% 7.00% 40.00% 14.00% 50.00% 50.00% Formulas #N/A #N/A #N/A #N/A
K Calculation of individual costs and WACC Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following weights: 35% long-term debt, 15% preferred stock, and 50% common stock equity (retained earnings, new common stock, or both). The firm's tax rate is 29%. Debt The firm can sell for $1025 a 12-year, $1,000-par-value bond paying annual interest at a 7.00% coupon rate. A flotation cost of 2.5% of the par value is required. Preferred stock 9.00% (annual dividend) preferred stock having a par value of $100 can be sold for $96. An additional fee of $5 per share must be paid to the underwriters. Common stock The firm's common stock is currently selling for $60 per share. The stock has paid a dividend that has gradually increased for many years, rising from $2.70 ten years ago to the $4.40 dividend payment, Do, that the company just recently…
Understanding the optimal capital structure Review this situation: Universal Exports Inc. is trying to identify its optimal capital structure. Universal Exports Inc. has gathered the following financial information to help with the analysis. Debt Ratio 30% 40% 50% 60% 70% Equity Ratio Consider this case: 70% 60% 50% 40% 30% Td Ts WACC 7.00% 10.50% 8.61% 7.20% 10.80% 8.21% 7.70% 11.40% 8.01% 8.90% 12.20% 8.08% 10.30% 13.50% 8.38% Which capital structure shown in the preceding table is Universal Exports Inc.'s optimal capital structure? Debt ratio = 40% ; equity ratio = 60% Debt ratio = 30% ; equity ratio = 70% Debt ratio 50 % ; equity ratio = 50% Debt ratio 60%; equity ratio = 40% Debt ratio 70% ; equity ratio= 30%
Ace Enterprises Limited is a large company involved in production and sale of petroleum products. The Finance Department of the company is trying to determine the company’s optimal capital structure. The firms’ financial advisors have developed the following table: Equity Ratio Debt Ratio Before Tax Cost of Debt 100% 0% 7% 80% 20% 8% 60% 40% 10% 40% 60% 12% 20% 80% 15% The company uses and applies the Capital Assets Pricing Model to estimate its cost of common equity. The company estimates that the risk free rate is 4.0%. The market risk premium is 6.0%, and its tax rate is 30 percent. The company estimates that if it had no debt, its unlevered beta would be 1.2. Required: A. Based on the above information, what is the firm’s optimal capital structure? B. What would the weighted average cost of capital be at the optimal capital structure? C. If a firm went from zero debt to successively higher levels of debt, why would you expect its stock price to first rise, then hit…
Review this situation: Universal Exports Inc. is trying to identify its optimal capital structure. Universal Exports Inc. has gathered the following financial information to help with the analysis. Debt Ratio 30% 40% 50% 60% 70% Equity Ratio 70% 60% 50% 40% 30% Id 7.00% 7.20% 7.70% 11.40% 8.90% 12.20% 10.30% 13.50% Is WACC 10.50% 8.61% 10.80% 8.21% 8.01% 8.08% 8.38% Which capital structure shown in the preceding table is Universal Exports Inc.'s optimal capital structure? Debt ratio = 70%; equity ratio = 30% Debt ratio 50%; equity ratio = 50% Debt ratio = 30%; equity ratio = 70% Debt ratio = 40%; equity ratio = 60% Debt ratio= 60%; equity ratio = 40%
What is the company's cost of debt? a. 9.21%b. 10.31%c. 11.5%d. 7.73% What is the company's cost of equity using the Capital Asset Pricing Model? a. 9.21%b. 10.31%c. 11.5%d. 7.73%
Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following weights: 40% long-term debt, 15% preferred stock, and 45% common stock equity (retained earnings, new common stock, or both). The firm's tax rate is 26%. Debt The firm can sell for $1005 a 13-year, $1,000-par-value bond paying annual interest at a 6.00% coupon rate. A flotation cost of 2.5% of the par value is required. Preferred stock 7.00% (annual dividend) preferred stock having a par value of $100 can be sold for $98. An additional fee of $5 per share must be paid to the underwriters. Common stock The firm's common stock is currently selling for $80 per share. The stock has paid a dividend that has gradually increased for many years, rising from $2.50 ten years ago to the $4.92 dividend payment, D0, that the company just recently made. If…
OPTIMAL CAPITAL STRUCTURE Terrell Trucking Company is in the process of setting its target capital structure. The CFO believes that the optimal debt-to-capital ratio is somewhere between 20% and 50%, and her staff has compiled the following projections for EPS and the stock price at various debt levels: Debt/Capital Ratio Projected EPS Projected Stock Price20% $3.10 $34.2530 3.55 36.0040 3.70 35.5050 3.55 34.00Assuming that the firm uses only debt and common equity, what is Terrell’s optimal capital structure? At what debt-to-capital ratio is the company’s WACC minimized?
Based on the following numbers, calculate the firm’s WACC, explaining in detail each step in your calculations and the formulas that you are using. You may find it useful to complete this task in Excel and include the Excel table in your response. Cost of debt (averaging over all the forms of debt used): 12%. Risk-free rate on Treasury Bonds: 5%. Expected return on the domestic portfolio: 9%. Effective tax rate: 20%. Share of debt in optimal capital structure: 65%. Share of equity in optimal capital structure: 35%. Beta: 1.2
Calculation of individual costs and WACC: Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following weights: 35% long-term debt, 10% preferred stock, and 55% common stock equity (retained earnings, new common stock, or both). The firm's tax rate is 28%. debt The firm can sell for $1010 a 14-year, $1,000-par-value bond paying annual interest at a 7.00% coupon rate. A flotation cost of 2.5% of the par value is required. Preferred stock 7.00% (annual dividend) preferred stock having a par value of $100 can be sold for $88. An additional fee of$4 per share must be paid to the underwriters. Common stock The firm's common stock is currently selling for $70 per share. The stock has paid a dividend that has gradually increased for many years, rising from $2.25 ten years ago to the $3.67 dividendpayment, D0, that…

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS