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
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- 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.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%You were hired as a consultant to XYZ Company, whose target capital structure is 35% debt, 7% preferred, and 58% common equity. The interest rate on new debt is 8.50%, the yield on the preferred is 4.20%, the cost of common from retained earnings is 16.15%, and the tax rate is 37.00%. The firm will not be issuing any new common stock. What is XYZ's WACC?Round your answer to two decimal places. For example, if your answer is $345.6671 round as 345.67 and if your answer is .05718 or 5.7182% round as 5.72. Group of answer choices 9.92% 11.77% 11.54% 13.38% 10.96%
- 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%Consider this case: Globex Corp. has a capital structure that consists of 30% debt and 70% equity. The firm’s current beta is 1.25, but management wants to understand Globex Corp.’s market risk without the effect of leverage. If Globex Corp. has a 25% tax rate, what is its unlevered beta? 0.90 0.81 1.09 0.95Consider this case: Globex Corp. currently has a capital structure consisting of 30% debt and 70% equity. However, Globex Corp.'s CFO has suggested that the firm increase its debt ratio to 50%. The current risk-free rate is 3.5%, the market risk premium is 7.5%, and Globex Corp.'s beta is 1.15. If the firm's tax rate is 25%, what will be the beta of an all-equity firm if its operations were exactly the same? Now consider the case of another company: US Robotics Inc. has a current capital structure of 30% debt and 70% equity. Its current before-tax cost of debt is 10%, and its tax rate is 25%. It currently has a levered beta of 1.15. The risk-free rate is 3.5%, and the risk premium on the market is 7.5%. US Robotics Inc. is considering changing its capital structure to 60% debt and 40% equity. Increasing the firm's level of debt will cause its before-tax cost of debt to increase to 12%. First, solve for US Robotics Inc.'s unlevered beta. Use US Robotics Inc.'s unlevered beta to solve…
- Now consider the case of another company: US Robotics Inc. has a current capital structure of 30% debt and 70% equity. Its current before-tax cost of debt is 10%, and its tax rate is 25%. It currently has a levered beta of 1.10. The risk-free rate is 3%, and the risk premium on the market is 7.5%. US Robotics Inc. is considering changing its capital structure to 60% debt and 40% equity. Increasing the firm’s level of debt will cause its before-tax cost of debt to increase to 12%. First, solve for US Robotics Inc.’s unlevered beta. 0.83 0.75 1.00 0.91 Use US Robotics Inc.’s unlevered beta to solve for the firm’s levered beta with the new capital structure. 1.76 1.67 1.58 1.94 Use US Robotics Inc.’s levered beta under the new capital structure, to solve for its cost of equity under the new capital structure. 14.58% 16.20% 12.96% 18.63% What will the firm’s weighted average cost of capital (WACC) be if it makes this change in…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.A firm has zero debt in its capital structure. Its overall cost of capital is 10%. The firm is considering a new capital structure with 60% debt. The interest rate on the debt would be 8%. Assuming there are no taxes, its cost of equity capital with the new capital structure would be:
- 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?Your company is financed 20% with riskless debt with a yield of 6% and 80% with equity with a cost of 14%. The corporate tax rate is 30%. a. What is the company's WACC at its existing capital structure? b. What would be the new WACC if it changes to being 40% debt financed?Globo-Chem Co. is an all-equity firm, and it has a beta of 1. It is considering changing its capital structure to 65% equity and 35% debt. The firm's cost of debt will be 10%, and it will face a tax rate of 25%. What will Globo-Chem Co.'s beta be if it decides to make this change in its capital structure? 1.82 Now consider the case of another company: US Robotics Inc. has a current capital structure of 30% debt and 70% equity. Its current before-tax cost of debt is 10%, and its tax rate is 25%. It currently has a levered beta of 1.15. The risk-free rate is 2.5%, and the risk premium on the market is 7.5%. US Robotics Inc. is considering changing its capital structure to 60% debt and 40% equity. Increasing the firm's level of debt will cause its before-tax cost of debt to increase to 12%. First, solve for US Robotics Inc.'s unlevered beta. Use US Robotics Inc.'s unlevered beta to solve for the firm's levered beta with the new capital structure. Use US Robotics Inc.'s levered beta under…