( WACC) Margo Corporation is a major producerof lawn care products. Its stock currently sellsfor $24 per share; there are 10.5 million sharesoutstanding. It has debt with a book valueof $400 million. Margo bonds yield 45% andtrade at 100% of face value. Bonds mature in 10years. The risk-free rate is 8%, the market riskpremium is 9% and Margo has a beta equal to1. The tax rate is 26.6%. The WACC is%.

Answered: ( WACC) Margo Corporation is a major…

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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Kl. 259.
Loran Chalices Inc. hired you as a consultant to estimate the company's WACC. You have obtained the following information. (1) The company's noncallable bonds mature in 20 years, have a coupon rate of 7.00% paid annually, a par value of $1,000, and a current market price of $875. (2) The company's tax rate is 25%. (3) The required rate of return on the company's common stock based on CAPM is 10.3%. (4) The target capital structure consists of 45% debt, with the remainder comprised of common equity. What is its WACC?
Company A is currently all-equity financed with 100 million shares. The EBIT will be 30 million in year1 and growing at 3% per year forever. The company always has a 40% corporate tax. The investorsdiscount cash flows from similar projects at 18% per year.Now, the company takes a 50-million loan to make distributions to the shareholders. The interest rateon the loan is 5%. There will be no principal repayments made until the loan is paid back in full in year5. Due to financial distress, 30% of Company A’s EBITs will be lost while it carries the 50-million debt.Capital gain tax is zero and dividend tax is 25%.a. If Company A announces that it will use the 50 million to repurchase shares, what will be the priceright after the share repurchase? What is the price right after the announcement?b. If Company A announces that it will use the 50 million to make a one-time dividend payout, what willbe the price right after the dividend payout? What is the price right after the announcement?
PDQ, Inc. expects EBIT to be approximately $12.2 million per year for the foreseeable future, and it has 100,000 20-year, 6 percent annual coupon bonds outstanding. (Use Table 11.1.)What would the appropriate tax rate be for use in the calculation of the debt component of PDQ’s WACC? (Round your answer to 2 decimal places.)
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 %
8. The Ewing Distribution Company is planning a $100 million expansion of its chain of discount service stations to several neighboring states. This expansion will be financed, in part, with debt issued with a coupon interest rate of 15 percent. The bonds have a 10-year maturity and a $1,000 face value, and they will be sold to net Ewing $990 after issue costs. Ewing's marginal tax rate is 40 percent. Preferred stock will cost Ewing 14 percent after taxes. Ewing's common stock pays a dividend of $2 per share. The current market price per share is $15, and new shares can be sold to net $14 per share. Ewing's dividends are expected to increase at an annual rate of 5 percent for the foreseeable future. Ewing expects to have $20 million of retained earnings available to finance the expansion. Ewing's target capital structure is as follows: INTERMEDIATE Debt 20% Preferred stock Common equity 75 Calculate the weighted cost of capital that is appropriate to use in evaluating this expansion…
Time Warner shares have a market capitalization of $55 billion. The company just paid a dividend of $0.35 per share and each share trades for $35. The growth rate in dividends is expected to be 6.5% per year. Also, Time Warner has $20 billion of debt that trades with a yield to maturity of 7%. If the firm's tax rate is 30%, compute the WACC?
You are given the following information for Huntington Power Company. Assume the company's tax rate is 25 percent. Debt: Common stock: Market: 30,000 4.9 percent coupon bonds outstanding, $2,000 par value, 25 years to maturity, selling for 104 percent of par; the bonds make semiannual payments. 470,000 shares outstanding, selling for $76 per share; the beta is 1.10. 6 percent market risk premium and 4.1 percent risk-free rate. What is the company's WACC?
You are given the following information for Huntington Power Co. Assume the company's tax rate is 40 percent. Debt: Common stock: 5,000 6.2 percent coupon bonds outstanding, $1,000 par value, 20 years to maturity, selling for 109 percent of par; the bonds make semiannual payments. 460,000 shares outstanding, selling for $56 per share; the beta is .96. Market: 5 percent market risk premium and 4.6 percent risk-free rate. What is the company's WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) WACC %
1. Sleeping Time has 8,000 bonds outstanding that are selling at 90% of par value. The bonds are issued with 8% annual coupon that matures in 15 years. The company also has 400,000 shares of common stock outstanding. The stock has a beta of 1.5 and sells for $30 a share. The U.S. Treasury bill is yielding 3% and the average return on market is 8%. Sleeping Time falls under 40% tax bracket. Required: What is Sleeping Time's weighted average cost of capital?
ABC International has an unlevered cost of capital of 10 %, a tax rate of 35 %, and expected earnings before interest and taxes of $26,500. The company has $40,000 in bonds outstanding that have a 7% coupon and pay interest annually. The bonds are selling at par value. What is the cost of equity?
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

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