Wintermelon Corp.'s controller is considering a change in the capital structure consisting of 40% debt and 60% equity. Initially, Winter Melon Corp.'s tax rate is 40%, its beta is 2.5, and it has no debt. The risk-free rat s 3.0 percent and the market risk premium is 7.0 percent. What is the be f the company did not resort to debt financing? * our answer

Wintermelon Corp.'s controller is considering a change in the capital structure consisting of 40% debt and 60% equity. Initially, Winter Melon Corp.'s tax rate is 40%, its beta is 2.5, and it has no debt. The risk-free rat s 3.0 percent and the market risk premium is 7.0 percent. What is the be f the company did not resort to debt financing? * our answer

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

Assume that Firms U and L are in the same risk class and that both have EBIT=$500,000. Firm U uses no debt financing, and its cost of equity is rsU=14%. Firm L has $1 million of debt outstanding at a cost of rd=8%. There are no taxes. Assume that the MM assumptions hold. Graph (a) the relationships between capital costs and leverage as measured by D/V and (b) the relationship between V and D. Now assume that Firms L and U are both subject to a 40% corporate tax rate. Using the data given in Part b, repeat the analysis called for in b(1) and b(2) using assumptions from the MM model with taxes.
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.
You have been hired by a new firm that is just being started. The CFO wants to finance with 60% debt, but the president thinks it would be better to hold the percentage of debt in the capital structure (wa) to only 10%. The company is small, so it is not subject to the interest deduction limitation. Other things held constant, and based on th data below, if the firm uses more debt, by how much would the ROE change, i.e., what is ROEHigher - ROELower? Do not round your intermediate calculations. Operating Data Other Data Capital $4,000 Higher wd 60% ROIC = EBIT(1 - T)/Capital 12.00% Higher interest rate 13% %3D Tax rate 25% Lower wd 10% Lower interest rate 9% a. 3.75% b. 2.22% C 2.80% d. 2.54% e. 1,87%
Please show all steps or else skip, all parts pls i will definitely like or else dislike thanks
You were hired as a consultant to Quigley Company, whose target capital structure is 35% debt, 10% preferred, and 55% common equity. The interest rate on new debt is 6.50%, the yield on the preferred is 6.00%, the cost of retained earnings is 11.25%, and the tax rate is 40%. The firm will not be issuing any new stock. What is Quigley's WACC? a. 10.11% b. 8.15% c. 9.28% d. 7.75%
B.F. Pierce & Company is considering changing its capital structure. The company currently has no debt and no preferred stock, but it would like to add some debt to take advantage of low interest rates and the tax shield. Its investment banker has indicated that the pre-tax cost of debt under various possible capital structures would be as follows: 8.66% 9.21% 8.83% Market Debt-to- Value Ratio 9.07% (WD) 0.00 0.20 0.40 0.60 0.80 Market Equity-to- Value Ratio (WE) 1.00 0.80 0.60 0.40 0.20 Market Debt-to- Equity Ratio (D/E) 0.00 0.25 0.67 1.50 4.00 Before-Tax Cost of Debt (rD) 5.00% The company uses the CAPM to estimate its cost of common equity. Currently the risk-free rate is 4%, the market risk premium is 6%, and the company's tax rate is 25%. The company estimates that its beta now (which is unlevered because it currently has no debt) is 0.8. Based on this information, what is the firm's weighted average cost of capital at its optimal capital structure? 6.00% 7.00% 8.00% 9.00%
Dilana Corporation., has no debt outstanding and a total capital of $600,000. Operating earnings (Earnings before interest and taxes, EBIT) are projected to be $30,000 if economic conditions are normal, $50,000 if conditions are good, and $0 if conditions are bad. The economic conditions are expected to be good with probability of 25%, normal with probability of 50%, and bad with a probability of 25%. Dilana is considering a $120,000 debt issue with a 10% interest rate. The proceeds will be used to repurchase shares of stock. There are currently 12,000 shares outstanding. Ignore taxes in this question. (a) What is the current share price? (b) Calculate earnings per share [EPS] under each of the three economic scenarios before any debt is issued. Also calculate the expected EPS. (c) Calculate return on equity [ROE] under each of the three economic scenarios before any debt is issued. Also calculate the expected ROE. d) Repeat part (b) assuming that Dilana goes through with…
Zerox Inc. is contemplating acquiring its peer firm-Nova Corporation since Zerox believes that Nova is poorly managed. The most recent information about Nova is as follows: FCFF = 200 million, Market value of equity=$2,000 million, Outstanding debt=200 million, Before-tax cost of debt=5%, Tax rate=30%, Beta=1. Nova is already in steady state and is expected to grow 6% a year in the long term. The treasury bond rate is 3%, and the market risk premium is 6%. Zerox believes that the current financial leverage of Nova is not optimal and intends to increase the debt ratio of Nova to 20% of total capital from current level after the acquisition, which will incur a cost of debt of 5.5%. How much is the value of control worth in this acquisition plan?rnrnGroup of answer choicesrnrna). $203.27 millionrnb). $2,526.32 millionrnc). $2,152.28 millionrnd). $756.50 millionrne). $193.27 million
Fujita, Incorporated, has no debt outstanding and a total market value of $250,000. Earnings before interest and taxes, EBIT, are projected to be $42,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 18 percent higher. If there is a recession, then EBIT will be 30 percent lower. The company is considering a $100,000 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 10,000 shares outstanding. Ignore taxes for this problem. a-1. Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued. Note: Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16. a-2. Calculate the percentage changes in EPS when the economy expands or enters a recession. Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded…
Orange Company was contemplating two (2) capital structure choices. The CFO should choose the optimal capital structure that the company must implement; this decision should maximize the stock price. To do so, the CFO must first perform calculations using data obtained from the company: Plan Alpha 20% debt & 80% equity Wd=20%, Wc= 80% Cost of debt (rd)= 12% Tax rate= 30% bL=1.2 Risk Premium (RP)=4% Risk-free rate (rf)= 6% rs=? WACC=? Plan Omega 30% debt & 70% equity Wd=30%, Wc= 70% Cost of debt(rd)= 10% Tax rate= 30% bL=1.5 Risk Premium (RP)=5% Risk-free rate (rf)= 8% rs=? WACC=? *Hint: Compute for the rs first before computing the WACC.
FFC is trying to establish its optimal capital structure. Its current capital structure consists of 25% debt and 75% equity; however, the CEO believes that the firm should use more debt. The risk-free rate, rRF, is 4%; the market risk premium, RPM, is 5%; and the firm’s tax rate is 40%. Currently, FFC has beta of 1.5. What would be FFC’s estimated cost of equity if it changed its capital structure to 40% debt and 60% equity? Should the company opt new capital structure, decide based on the cost of equity computations?
Horizon Corporation has decided to a capital restructuring. This process of restructuring involves increasing its existing $80 million in debt to $125 million. However, the interest rate on the debt is 9 percent and it is not expected to change. The firm currently has 10 million shares outstanding, and the price per share is $60. If the restructuring is expected to increasethe return on equity (ROE), what is the minimum level for EBIT that Horizon’s management must be expecting? Ignore taxes in your answer.

SEE MORE QUESTIONS

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

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

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