Star Plc is a coffee machines producer. The Star's Plc common stock has a beta of 0.8. The Treasury bill rate is currently 1%, and the market risk premium is estimated at 8%. The book and market values of company's equity are 9,000,000$ (book) and 12,000,000$ (market) respectively. Star's Plc debt amounts to 5,000,000$. The interest rate on debt is 6%. Assume that market value of debt is equal to its book value. The corporation tax rate is 30%. a. What is the company's weighted average cost of capital (WACC)? b. Star Plc is looking into undertaking a new project which has an internal rate of return of 12% and has similar characteristics to the projects currently undertaken by company, should the company accept the project? Briefly justify your answers c. How would your answer to the part b) change if the potential project has a risk that is significantly different from the risk of the projects currently undertaken by the company? Briefly explain.

Star Plc is a coffee machines producer. The Star's Plc common stock has a beta of 0.8. The Treasury bill rate is currently 1%, and the market risk premium is estimated at 8%. The book and market values of company's equity are 9,000,000$ (book) and 12,000,000$ (market) respectively. Star's Plc debt amounts to 5,000,000$. The interest rate on debt is 6%. Assume that market value of debt is equal to its book value. The corporation tax rate is 30%. a. What is the company's weighted average cost of capital (WACC)? b. Star Plc is looking into undertaking a new project which has an internal rate of return of 12% and has similar characteristics to the projects currently undertaken by company, should the company accept the project? Briefly justify your answers c. How would your answer to the part b) change if the potential project has a risk that is significantly different from the risk of the projects currently undertaken by the company? Briefly explain.

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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Gina Electronics Inc. has long-term bonds with a face value of $2M, the coupon rate on the bonds is 5% and the yield on the bonds is also 5%. The unlevered cost of equity is 12.5%, and the value of Sun's equity is $3.6M. The corporate tax rate is 40%. What is Gina's WACC?
A firm is planning on issuing new bonds and equity. The semiannual bonds will have a coupon rate 9% with a maturity of 15 years. The preferred stock pays a dividend of $6. The common stock's current dividend is $2.50 with a growth rate of 7%. The flotation costs on bonds is 5%, 7% on preferred stocks and 10% on common stock. The tax rate is 35%. The current price of the bonds is $975 while the price of the common stock is $53.50 and $55 for the preferred stock. If the growth rate falls to 6%, what is change in the cost of external equity? external equity falls by 8.5% external equity falls by 7% external equity falls by 6.5% external equity falls by 6%
TT Industries is trading for $20 per share and has 25 million shares outstanding. TT Industries has a debt-equity ratio of 0.4 and its debt is zero coupon debt with a ten-year maturity and a yield to maturity of 8%. Which of the following best describes TT's debt using a put option? A) Short $200 million in risk-free debt and Long a put option on the firm's assets with a $200 strike price B) Long $200 million in risk-free debt and Short a put option on the firm's assets with a $700 strike price C) Long $200 million in risk-free debt and Short a put option on the firm's assets with a $200 strike price D) Short $200 million in risk-free debt and Long a put option on the firm's assets with a $700 strike price
Swift plc has 10,000 shares. The current share price is £40, and the cost of equity is 13%. The company has also 1,000 bonds outstanding, with 13 years to maturity, a coupon rate of 8% and a face value of £1,000. The bonds make semiannual coupon payments and the current price is £856.25 per bond. The tax rate is 20%. What is the weighted average cost of capital (WACC) of the company? Select one: a. 9.5% b. None of these answers is correct. c. 9.4% d. 9.7% e. 9.6%
Badger Corp. has an issue of 6% bonds outstanding with 6 months left to maturity. The bonds are currently priced at $993.02, and pay interest semiannually. The firm's marginal tax rate is 40%. The estimated risk premium between the company's stock and bond returns is 5%. The firm's expects to maintain a capital structure with 40% debt and 60% equity going forward. The company's W.A.C.C. is ____%.
Kl. 259.
ABC Trucking's balance sheet shows a total of noncallable $30 million long-term debt with a coupon rate of 6.80% and a yield to maturity of 8.10%. This debt currently has a market value of $48 million. The balance sheet also shows that the company has 10 million shares of common stock, and the book value of the common equity is $213.00 million. The current stock price is $23.80 per share; stockholders' required return, rs, is 15.05%; and the firm's tax rate is 36.00%. The CFO thinks the WACC should be based on market value weights, but the president thinks book weights are more appropriate. What is the difference between the WACCs using market value and the book value?Work with at least 4 decimals and round your final answer to two decimal places. For example, if your answer is $345.6671 round as 345.67 and if your answer is .05718 or 5.7182% round as 5.72. Group of answer choices –0.46% –0.49% –0.44% –0.34% –0.36%
Saeed Construction’s CFO has the following information to estimate the company’s weighted average cost of capital:The company currently has 20-year, 8.5% semi-annual coupon bonds that currently sells for Rs.945.The company’s stock has a beta of 0.80.The market risk premium, RPm , equals 3%.The risk-free rate is 2.4% and market rate is 5.4%. The company’s growth (g) = 0%, stock price (P0) = Rs.50, current dividend (D0) = Rs.2 and additional/new equity flotation cost = 15%.The company has outstanding preferred stock that pays a Rs.2.00 annual dividend. The preferred stock sells for Rs.25 a share.The company’s tax rate is 40%. The company’s capital structure consists of 40% long-term debt, 40% common stock, and 20% preferred stock. Requirement: Calculate Component cost of debt, cost of equity, cost of preferred stock and weighted average cost of capital.
Ripple Wine Merchants has 10,700 shares of stock outstanding at a price per share of $63. The risk-free rate is 2.8% and the expected market return is 9.8 %. Ripple has a beta of 1.59. The company also has 320 bonds outstanding, with a par value of $1000 per bond. The after-tax cost of debt is 5.89% and the bonds sell for 93.6% of par. What is the firm's WACC if the tax rate is 21%? O Multiple Choice 9.52% 9.44% 9.78% 9.14%
Badger Corp. has an issue of 6% bonds outstanding with 6 months left to maturity. The bonds are currently priced at $1,008.11, and pay interest semiannually. The firm's marginal tax rate is 40%. The estimated risk premium between the company's stock and bond returns is 5%. The firm's expects to maintain a capital structure with 40% debt and 60% equity going forward. The company's W.A.C.C. is %. Margin of error for correct responses: +/-.10(%) Rounding and Formatting instructions: Do not enter dollar signs, percent signs, commas, X, or any words in your response. Do not round any intermediate work, but round your "final response to 2 decimal places (example: if your answer is 12.3456, 12.3456%, or $12.3456, you should enter 12.35).
XYZ Banks Inc. is a short-term lender. XYZ is all equity financed. XYZ has 20 million shares outstanding which trade for P7 per share. XYZ's shareholders require a return of 9%. Cash-Mart Financial is also a short-term lender. It's shares are trading for P15 per share. Cash-Mart has 10 million shares outstanding. Cash-Mart's corporate bonds are rated BB and are trading for 87.5% of face value to yield 7%. The face value of Cash-Mart's debt is P100 million. What is the required return of Cash-Mart's shareholders? (Assume that the tax rate is 0%.)
Charter Corp. has issued 1,554 debentures with a total principal value of $1,554,000. The bonds have a coupon interest rate of 9%. a. What dollar amount of interest per bond can an investor expect to receive each year from Charter? b. What is Charter's total interest expense per year associated with this bond issue? c. Assuming that Charter is in a 39% corporate tax bracket, what is the company's net after-tax interest cost associated with this bond issue?

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