The table reports book values for Corp X, incorporated in the US. The company has paid $300.000 for interest on debt in the FY, its current Market-to-Book Ratio is 1,5. The interest rate on the 10Y US Treasur Bond is 2%. The return on the S&P500 index is 12%, while, after estimating variance and covariance for Corp X and S&P, you find that the beta for Corp X is 1,1. The tax rate is 24%. What is Corp X's after-tax WACC? Corporation X (Book Values) $6MIn Debt $4MIn Equity Asset Value $10MIn

The table reports book values for Corp X, incorporated in the US. The company has paid $300.000 for interest on debt in the FY, its current Market-to-Book Ratio is 1,5. The interest rate on the 10Y US Treasur Bond is 2%. The return on the S&P500 index is 12%, while, after estimating variance and covariance for Corp X and S&P, you find that the beta for Corp X is 1,1. The tax rate is 24%. What is Corp X's after-tax WACC? Corporation X (Book Values) $6MIn Debt $4MIn Equity Asset Value $10MIn

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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BHP Billiton, an Australian company, just paid $0.85 as a dividend, which is expected to grow at 5.0 per cent. Its most recent stock price is $72. Further, the company has a debt issue outstanding with 23 years to maturity that is quoted at 60 per cent of face value. The issue makes semiannual payments and has an embedded cost of 6 per cent annually. It considers a debt-equity ratio of 0.60 and a 22 per cent corporate tax rate. This year, the company has an EBIT of $3.15 million. Depreciation, the increase in net working capital, and capital spending were $265,000, $105,000, and $495,000, respectively. Therefore, you expect that over the next five years, EBIT will grow at 15 per cent per year, depreciation and capital spending will grow at 20 per cent per year, and NWC will grow at 10 per cent per year. It also has $19.5 million in debt and 400,000 shares outstanding. After Year 5, the adjusted cash flow from assets is expected to grow at 3.50 per cent indefinitely. Answer the…
Clifford Chance is a large U.K. firm with the before tax cost of debt of 10%. The risk-free rate of interest on 10-year Treasury bonds is 4%. The expected return on the market portfolio is 8%. After effective taxes, Clifford Chance’s effective tax rate is 20%. Its optimal capital structure is 70% debt and 30% equity. If Clifford Chance’s beta is estimated at 1.5, what is its weighted average cost of capital? (4 marks) This firm has collected 50,000 GBP from U.K. stock and bond markets by using the weighted average cost of capital calculated in step (a). It has invested this fund on a 3-year project in U.K. and earned the cash flows of 10,000, 15,000, and 20,000 for the first, second, and third years of the project, respectively. Calculate Net Present Value of the project and provide a decision whether this project is acceptable for investment?
Given the following information,what is the cost of equity capital for JJ&Co Pty Ltd? JJ&Co equity returns currently have a variance of 46.5%². The market portfolio has a 7.5% expected return and a variance of 40%². The correlation between JJ&Co equity returns and the market portfolio is 0.5. The risk-free rate is 2%.
The common stock of Buildwell Conservation & Construction Incorporated (BCCI) has a beta of 0.9. The Treasury bill rate is 4%, and the market risk premium is estimated at 8%. BCCI’s capital structure is 30% debt, paying an interest rate of 5%, and 70% equity. The debt sells at par. Buildwell pays tax at 21%. What is BCCI’s cost of equity capital? Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place. What is its WACC? Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. If BCCI is presented with a normal project with an internal rate of return of 12%, should it accept the project if it has the same level of risk as the current firm?
The covariance of returns between Share A and Share B is 0.0243. Share A has exhibited historical returns with a mean of 12% and standard deviation of 18%. Over the same period, Share B had average returns of 21% with a standard deviation of 27%. Calculate the expected return and standard deviation of a portfolio consisting of $50,000 in Share A and $100,000 in Share B.
Estimating Components of both WACC and DDMAn analyst estimates the cost of debt capital for Abbott Laboratories is 3.0% and that its cost of equity capital is 5.0%. Assume that ABT’s statutory tax rate is 21%, the risk-free rate is 2.1%, the market risk premium is 5%, the ABT market price is $84.10 per common share, and its dividends are $1.28 per common share.(a) Compute ABT’s average pretax borrowing rate and its market beta. (Round your answers to one decimal place.) Average borrowing rate = Market beta = (b) Assume that its dividends continue at the current level in perpetuity. Use the constant perpetuity dividend discount model to infer the market's expected cost of equity capital. (Hint: Use Price per share = Dividends per share/Cost of equity capital.) (Round your answer to one decimal place.)
There are only shares of A and B companies in the market. Currently, the market value of A and B shares is $200 million and $300 million, respectively. In addition, the risk-free interest rate (Rf) is 5 per cent. The probability and rate of return for the future state of the two entities are given as follows: (Value values with a decimal place or higher to the fifth decimal place.) 1) Obtain the expected return and variance of Entity A and B, respectively. 2) When forming a market portfolio with two shares, obtain the expected return rate and variance and standard deviation of the market portfolio. 3) Calculate the beta of share A, and calculate the required yield of share A. state probability Ra Rb 1 0.3 0.30 0.20 2 0.4 0.15 -0.10 3 0.3 0.05 0.10
Mint Industries has a target debt-equity ratio of 0.60, a cost of equity of 10%, and one issue of bonds that are offering a yield to maturity of 7.67%. If Minder’s tax rate is 40%, what is the company’s WACC?
The table below shows standard deviations and correlation coefficients for seven stocks from different countries. Calculate the variance of a portfolio with equal investments in each stock. (Use decimals, not percents, in your calculations. Do not round intermediate calculations. Round your answer to 4 decimal places.) \table[[,BHP,,,,Toronto,,],[,Billiton,Siemens,Nestlé,LVMH,Dominion Bank,Samsung,BP],[BHP Billiton,1.00,0.32,0.42,0.36,0.22,0.36,0.19],[Siemens,,1.00,0.33,0.22,0.19,0.36,-0.09],[Nestlé,,,1.00,0.12,0.13,0.05,0.13],[LVMH,,,,1.00,0.30,0.48,-0.04],[Toronto Dominion Bank,,,,,1.00,0.07,-0.07],[Samsung,,,,,,1.00,-0.06],[BP,22.00,33.80,44.80,20.30,14.00,34.50,42.40],[Standard deviation (%),,,,,,,]] Portfolio variance

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