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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Concept explainers

Exchange Rate Risk

It is the possibility that the value of a currency will fluctuate in the future. In the wake of globalization, business establishments have increasingly ventured into international markets. The volume of international trade has prospered excellently in the near past and is expected to be more affluent in the future. The use of exchange-traded derivative financial instruments has been multi-folded to provide for the requirements of various MNCs and offshore potential investors. Most banks and financial institutions have helped integrate the global economies. Our Government has introduced some bold and extreme measures to fulfil the purpose behind the fiscal, industrial, and monetary policies. The enactment of GST is a huge step towards streamlining the taxation system of the country. Owing to Covid-19, this aspect of corporate risk management has become critical.

Question

Example:
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 Treasury
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

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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…
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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.)
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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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