Use the following information:. Debt: $79,000,000 book value outstanding. The debt is trading at 94% of book value. The yield to maturity is 7%.Equity: 2,900,000 shares selling at $46 per share. Assume the expected rate of return on Federated's stock is 16%.Taxes: Federated's marginal tax rate is Tc 0.21.Suppose Federated Junkyards decides to move to a more conservative debt policy. A year later, its debt ratio is down to 14.00% (D/V =0.1400). The interest rate has dropped to 6.6%. The company's business risk, opportunity cost of capital, and tax rate have notchanged.Use the three-step procedure to calculate Federated's WACC under these new assumptions. (Do not round intermediatecalculations. Enter your answer as a percent rounded to 2 decimal places.)Weighted-average cost of capital

Calculation of Total Market Value:

Answered: Use the following information: . Debt:…

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

See similar textbooks

Similar questions

Farmington Company can borrow at 7.05 percent. The company currently has no debt and the cost of equity is 11.4 percent. The current value of the firm is $655,000. The corporate tax rate is 22 percent. What will the value be if the company borrows $370,000 and uses the proceeds to repurchase shares? Note: Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.
Micolash Industries plans to reduce the use of debt financing and increase the use of equity financing (for example, move from a 70% Debt-to-Capital Ratio to 50%). Assume that the company, which does not pay any dividends, takes this action, and that total assets, operating income (EBIT), and its tax rate (say 40%) all remain constant. Which of the following would occur? Group of answer choices The company’s interest expense would remain constant. The company would have less common equity than before. The company’s taxable income (EBT) would fall. The company would have to pay more taxes. The company’s net income would decrease.
Jenkins, Inc., has equity with a market value of $22.6 million and debt with a market value of $11.3 million. The cost of debt is 8 percent per year. Treasury bills that mature in one year yield 4 percent per year, and the expected return on the market portfolio over the next year is 10 percent. The beta of the company's equity is 1.11. The firm pays no taxes. a. What is the company's debt-equity ratio? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the company's weighted average cost of capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c. What is the cost of capital for an otherwise identical all-equity firm? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. Debt-equity ratio b. Weighted average cost of capital C. Cost of capital 0.50 % %
Use the following information: • Debt: $68,000,000 book value outstanding. The debt is trading at 89% of book value. The yield to maturity is 11%. Equity: 1,800,000 shares selling at $35 per share. Assume the expected rate of return on Federated's stock is 20%. Taxes: Federated's marginal tax rate is Te 0.21. Suppose Federated Junkyards decides to move to a more conservative debt policy. A year later, its debt ratio is down to 16.75% (D/V= 0.1675). The pre-tax cost of debt has dropped to 10.6%. The company's business risk, opportunity cost of capital, and tax rate have not changed. Use the three-step procedure to calculate Federated's WACC under these new assumptions. Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Weighted-average cost of capital %
Hawar International is a shipping firm with a current share price of $4.50 and 10 million shares outstanding. Suppose Hawar announces plans to lower its corporate taxes by borrowing $10 million and repurchasing shares. a. With perfect capital markets, what will the share price be after this announcement? b. Suppose that Hawar pays a corporate tax rate of 40%, and that shareholders expect the change in debt to be permanent. If the only imperfection is corporate taxes, what will the share price be after this announcement? c. Suppose the only imperfections are corporate taxes and financial distress costs. If the share price rises to $4.55 after this announcement, what is the PV of financial distress costs Hawar will incur as the result of this new debt? Question content area bottom Part 1 a. With perfect capital markets, what will the share price be after this announcement? With perfect capital markets, the share price will be $enter your response here per share
Consider the following information for Abracadabra of America . Debt $84,000,000 book value outstanding The debt is trading at 86% of book value. The yield to maturity is 7% . Equity: 3.400,000 shares selling at $51 per share. Assume the expected rate of return on Abracadabra's stock is 16% . Taxes: Abracadabra's marginal tax rate is T0.21. You want to include financing in your valuation decision. Calculate the rate that you would use (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) answer
Debt: $69,000,000 book value outstanding. The debt is trading at 95% of book value. The yield to maturity is 10%. Equity: 1,900,000 shares selling at $36 per share. Assume the expected rate of return on Federated's stock is 19%. • Taxes: Federated's marginal tax rate is T_{c} = 0.21 . Suppose Federated Junkyards decides to move to a more conservative debt policy. A year later, its debt ratio is down to 16.50% (D/V= 0.1650). The pre-tax cost of debt has dropped to 9.6%. The company's business risk, opportunity cost of capital, and tax rate have not changed. Use the three-step procedure to calculate Federated's WACC under these new assumptions.
Garcia Company has no debt. Its cost of capital is 10.8 percent. Suppose the company converts to a debt-equity ratio of 1. The interest rate on the debt is 7.9 percent. Ignore taxes for this problem. What is the company’s new cost of equity? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. What is its new WACC? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.
Hubbard's Pet Foods is financed 60% by common stock and 40% by bonds. The expected return on the common stock is 13.1%, and the rate of interest on the bonds is 7.7%. Assume that the bonds are default-free and that there are no taxes. Now assume that Hubbard's issues more debt and uses the proceeds to retire equity. The new financing mix is 30% equity and 70% debt. Assume the debt is still default free. a. Given the initial capital structure, calculate the expected return on equity. Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place. Expected rate of return % b. Given the revised capital structure, calculate the expected rate of return on equity. Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Expected rate of return %
Jenkins, Inc., has equity with a market value of $23.1 million and debt with a market value of $9.24 million. The cost of debt is 10 percent per year. Treasury bills that mature in one year yield 6 percent per year, and the expected return on the market portfolio over the next year is 11 percent. The beta of the company's equity is 1.16. The firm pays no taxes. a. What is the company's debt-equity ratio? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the company's weighted average cost of capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g.. 32.16.) c. What is the cost of capital for an otherwise identical all-equity firm? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. Debt-equity ratio b. Weighted average cost of capital C. Cost of capital 0.40 11.29% %
The total market value of the common stock of the Okefenokee Real Estate Company is $11.5 million, and the total value of its debt is $7.3 million. The treasurer estimates that the beta of the stock is currently 1.2 and that the expected risk premium on the market is 9%. The Treasury bill rate is 3%. Assume for simplicity that Okefenokee debt is risk-free and the company does not pay tax. a. What is the required return on Okefenokee stock? Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. b. Estimate the company cost of capital. Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. c. What is the discount rate for an expansion of the company's present business? Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. d. Suppose the company wants to diversify into the manufacture of rose-colored spectacles. The beta of unleveraged…
XYZ borrows $800 million at an interest rate of 7.6%. Prior to this borrowing, it was an all-equity firm. It expects to maintain this debt level indefinitely. XYZ pays taxes at an effective rate of 37%. By how is the market value of XYZ expected to change because of the borrowing? [Hint: Tax shield?]

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS