Titan has 9 million shares in issue and £12 millionnominal 6.5% coupon annual bonds outstandingwhich yield 7.2%. The equity price is £1.40 per shareand the Equity Beta is 1.20. The bonds have aweighted average price of 100%. Market RiskPremium is 10%, T-Bills yield 5% and Titan's taxrate is 28%.Show capital structure and valuation and calculateWACC.

To calculate the WACC (Weighted Average Cost of Capital) for Titan, we first need to determine the…

Answered: Titan has 9 million shares in issue and…

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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Apel Investment Company has GH¢1,800,000 of interest-bearing bond outstanding. The outstanding bonds have a 11% coupon and a 14% yield to maturity. Management believes they could issue new bonds at a premium of 105% that would provide a similar yield to maturity. Also, the company’s prepared stock currently stands at GH¢1,200,000 and trades at GH¢60.00 per share. The company pays a dividend of GH¢3.00 per share. Furthermore, the company’s common stock sells for GH¢15.00 per share with 200,000 shares in issue. The company has a beta of 1.2, whiles the government’s T-Bill has an interest rate of 12%, with a 18% average return on the market. The company’s marginal tax rate is 40%.Management is considering investing in a new project, the details of which are as follows:GH¢ Project cost 2,000,000.00Estimated net profit: Year 1 (22,000.00) Year 2 192,000.00 Year 3 300,000.00Year 4 270,000.00Year 5 180,000.00Additional information; Depreciation is based on the straight line method. The…
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 has a bank loan with a 10% interest rate. The firm also has in issue 8% preference shares trading at nominal value and has estimated that its cost of ordinary shares is 18%. The firm has a 30% tax rate. What is the weighted average cost of capital if the firm uses a capital structure comprising 50% debt and an even split between preference and ordinary shares?
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%
6
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.
XYZ Corp. has bonds outstanding with a coupon rate of 2% and a YTM of 5.7%. The risk - free rate of return is 2.2% and the market is returning 10.0%. The stock has a beta of 0.9 and the firm is financed with 45% debt and 55% equity. If the tax rate is 24%, what is XYZ's WACC?
S. ALAM group financed using the following weights: 35% long term debt, 15% preferred stock and 40% common stock equity, and 10% retained earnings. The firm's corporate tax rate is 38% I. The firm can sell for tk. 990 an 8 years bond, Tk. 1000 par-value bond paying at an 11% coupon rate, flotation cost of per bond is 3.75% and under pricing by 2%. I1. Eleven percent (annual dividend) preferred stock having a par value of tk. 100 can be sold for tk. 85. An additional fee of tk. 5 per share must be paid to the underwriters. II. The firm's common stock currently selling for tk. 55 per share. The dividend expected to be paid at the end of the year is Tk. 5.35 per share. Dividends have been growing at an annual rate of 8.5%. Moreover, underwriting fees per share Tk. 7. a. Caleulate the WACC of the project and implications of investment decisions. b.The following two mutually exclusive projects have cash flows for its 5 years lifetime and cost of capital should be based on financing rubric…
Calculate the weighted average cost of capital for the following Dunkie company (WACC). The Dunkie company's bond is currently selling for 102% of par. The bond is a semi-annual, 20-year bond issued 7 years ago with a face value of $1000.00 with a coupon of 8%. There were 95,000 bonds issued. The company's corporate tax rate is 32%. The Dunkie company has issued both preferred and common stock. The preferred stock pays $3.35 per share and is selling for $97.00. There are 100,000 shares of preferred stock. The company has a beta of .95. You've calculated the return of the market to be 9.5% and the market risk premium is 5.75%. The Dunkie company stock is selling for $15.75 and there are 5,000,000 shares outstanding. What is the weighted average cost of capital for the Dunkie company?
A firm raises capital by selling $18,000 worth of debt with flotation costs equal to 2% of its par value. If the debt matures in 10 years and has an annual coupon interest rate of 9%, what is the bond's YTM?
Big Door Company has 8.7 million shares outstanding, which are currently trading for about $13 per share and have a levered equity beta of 1.2. Big Door has 19,900 outstanding bonds, with a 4% coupon rate, payable semi-annually and due in 10 years. The bonds are rated BBB. Currently the credit spread for BBB is 178 basis points over equivalent-maturity Government of Canada debt. The current yield on 10-year Canada bonds is 5%, compounded semi-annually. The risk-free interest rate is 2%, and the market risk premium is 6.6%. The company has a 35% tax rate. (Do not round intermediate calculations.) a. Calculate Big Door's WACC. (Round your answer to 2 decimal places.) WACC b. Calculate Big Door's unlevered beta, using the following formula: (Round your answer to 2 decimal places.) Pleveret Pdebtx (1–Tc)×D/E BU 1+(1–Tc)×D/E es Unlevered beta c. If Big Door was 50% debt-financed, what would be its WACC? Assume that the beta of its debt is unchanged by the capital structure change. (Round…
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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