Use the following information pertaining to Totem #16-#20. You are assessing the optimal capital structure for Totem Holdings, a large publicly traded chemical company with 100 million shares trading at $30 per share and $1 billion in debt outstanding. The firm currently has a pre-tax cost of debt of 6% and you have correctly estimated the current cost of capital to be 9%. The firm is planning to borrow an additional $2 billion (which will push up the pre-tax cost of debt to 7%) and use the proceeds to buy back $1 billion in stock and invest $1 billion in its existing business. For simplicity, assume that the debt beta remains to be zero. The firm's tax rate is 40%, the current riskfree rate is 5%, and the market risk premium is 4%.
Use the following information pertaining to Totem #16-#20. You are assessing the optimal capital structure for Totem Holdings, a large publicly traded chemical company with 100 million shares trading at $30 per share and $1 billion in debt outstanding. The firm currently has a pre-tax cost of debt of 6% and you have correctly estimated the current cost of capital to be 9%. The firm is planning to borrow an additional $2 billion (which will push up the pre-tax cost of debt to 7%) and use the proceeds to buy back $1 billion in stock and invest $1 billion in its existing business. For simplicity, assume that the debt beta remains to be zero. The firm's tax rate is 40%, the current riskfree rate is 5%, and the market risk premium is 4%.
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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Transcribed Image Text:Use the following information pertaining to Totem
#16-#20.
You are assessing the optimal capital structure for Totem Holdings, a large publicly
traded chemical company with 100 million shares trading at $30 per share and $1
billion in debt outstanding. The firm currently has a pre-tax cost of debt of 6% and you
have correctly estimated the current cost of capital to be 9%. The firm is planning to
borrow an additional $2 billion (which will push up the pre-tax cost of debt to 7%) and
use the proceeds to buy back $1 billion in stock and invest $1 billion in its existing
business. For simplicity, assume that the debt beta remains to be zero. The firm's tax
rate is 40%, the current riskfree rate is 5%, and the market risk premium is 4%.
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