Unlevered Cost of EquityElliott's Cross Country TransportationServices has a capital structure with25% debt at a 10% interest rate. Itsbeta is 1.5, the risk-free rate is 4%, andthe market risk premium is 8%. Elliott'scombined federal-plus-state tax rate is25%.What is Elliott's cost of equity? Do notround intermediate calculations.Round your answer to two decimalplaces.%What is its weighted average cost ofcapital? Do not round intermediatecalculations. Round your answer totwo decimal places.%What is its unlevered cost of equity?Do not round intermediatecalculations. Round your answer totwo decimal places.%

concept. β 1. according to CAPM ( capital asset pricing model ), ke = Rf + β ( Rm - Rf) where ,…

Answered: Unlevered Cost of Equity Elliott's…

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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e Weighted average cost of capital American Exploration, Inc., a natural gas producer, is trying to decide whether to revise its target capital structure. Currently it targets a 50-50 mix of debt and equity, but it is considering a target capital structure with 80% debt. American Exploration currently has 6% after-tax cost of debt and a 12% cost of common stock. The company does not have any preferred stock outstanding. ptions a. What is American Exploration's current WACC? b. Assuming that its cost of debt and equity remain unchanged, what will be American Exploration's WACC under the revised target capital structure? c. Do you think shareholders are affected by the increase in debt to 80%? If so, how are they affected? Are the common stock claims riskier now? d. Suppose that in response to the increase in debt, American Exploration's shareholders increase their required return so that cost of common equity is 16%. What will its new WACC be in this case? e. What does your answer in…
Assume there are two firms with a MV of $50,000,000. Firm A consists of 10% debt and 90% equity. Firm B consists of 40% debt and 60% equity. Assume perfect capital markets and M&M Proposition 2 holds. Which firm will have a higher expected return for equity holders? Why? For the toolhar prace ALT+F10/PC or ALT+FN+F10 (Mac).
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…
F1
Evans Technology has the following capital structure. Debt Common equity 35% 65 The aftertax cost of debt is 7.50 percent, and the cost of common equity (in the form of retained earnings) is 14.50 percent. a. What is the firm's weighted average cost of capital? Note: Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places. Debt Common equity Weighted average cost of capital Weighted Cost % % An outside consultant has suggested that because debt is cheaper than equity, the firm should switch to a capital structure that is 50 percent debt and 50 percent equity. Under this new and more debt-oriented arrangement, the aftertax cost of debt is 8.50 percent, and the cost of common equity (in the form of retained earnings) is 16.50 percent. Debt Common equity Weighted average cost of capital b. Recalculate the firm's weighted average cost of capital. Note: Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal…
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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%
Assume Hayworth corp. has an operating leverage of 5.39 and a financial leverage of 1.53. How much would the EPS of Hayworth corp. increase if sales increased by 0.23? Instruction: Round to three decimal places
Question: Fama's Llamas has a weighted average cost of capital of 9.5%. The company's cost of equity is 11%, and its cost of debt is 7.5%. The tax rate is 40%. What is the company's debt- equity ratio? (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.)
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…

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