X Corporation has total assets of P100 million. Earnings before interest and taxes wereP20 million and the tax rate was 35%. Given are the following leverage ratios andcorresponding interest rates.1.2.3.4.5.Leverage(Debt / Total Assets)0%10305060Interest Rateon Debt-16 %161821Calculate Litton's rate of return on equity and WACC for each amount of debt.What is the optimal capital structure?If you were the finance manager, which capital structure would you choose? Justify.

The weighted average cost of capital refers to the cost of capital proportionate to the capital…

Answered: X Corporation has total assets of P100…

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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If the return on asset (ROA) is 10%, the pre-tax cost of debt is 8%, and the corporate tax rate is 20%. What will the return on equity (ROE) be if the capital structure is 60% equity and 40% debt? Group of answer choices 10% 13.6% 9% 12.4%
Suppose you are estimating the WACC for Columbus Inc. It has the following data from its balance sheet: total debt = $200 million; total equity=$120 million. It has 20 million shares outstanding, and its stock is trading at $32 per share. Your analysis shows that the company's current borrowing rate is 7%, and that the cost of equity is 13%. If the company marginal tax rate is 30%, what is its WACC?
A company has a WACC of 10%. It can borrow at 4%. Assume that the company has a target capital structure of 60% equity, 40% debt. The corporate tax rate is 20%. Based on MM Theory with taxes, what is the cost of equity? What is the WACC?
Pls help correctly, I only need c part and correct with approach and explanation.
Consider a project of the Cornell Haul Moving Company, the timing and size of the incremental after-tax cash flows (for an all-equity firm) are shown below in millions: Time Cash Flow -$ 990 125 250 375 500 The firm's tax rate is 34 percent; the firm's bonds trade with a yield to maturity of 8 percent; the current and target debt-equity ratio is 2; if the firm were financed entirely with equity, the required return would be 10 percent. What is the levered after-tax incremental cash flow for year 2? 0000 2 3 4 $185,796,000 $215,152,000 $284,848,000 $267,952,000
A company is considering its optimal capital structure. The firm currently has 1 million shares outstanding at $ 20 per share (tax rate = 40%) and a debt balance of $5 million. Currently, its (levered) beta is 1.5 and its ERP is 5.5%. The current risk-free rate is 5%. Your research indicate the following ratings and pre-tax cost of debt across the different debt ratios: D/(D+E) Rating Pre-tax cost of debt 0% AAA 10% 10% AA 10.5% 20% A 11% 30% BBB 12% 40% BB 13% 50% B 14% 60% CCC 16% 70% CC 18% 80% C 20% 90% D 25% a. Using the optimal WACC approach, what is the firm's optimal debt ratio? b. Calculate the company's unlevered value, assuming that the probability of default is 5% and the company loses 30% of its value in the event of a default.
The Black Bird Company plans an expansion. The expansion is to be financed by selling $21 million in new debt and $57 million in new common stock. The before-tax required rate of return on debt is 9.77% percent and the required rate of return on equity is 13.11% percent. If the company is in the 34 percent tax bracket, what is the weighted average cost of capital?
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?
Suppose Alcatel-Lucent has an equity cost of capital of 10%, market capitalization of $10.8 billion, and an enterprise value of $14.4 billion. Suppose Alcatel-Lucent’s debt cost of capital is 6.1% and its marginal tax rate is 35%. The cash flow for the project is as follows, same as was given in the previous question. Year 0 1 2 3 FCF -100 50 100 Calculate FCFE for each year but only answer: What is the Percentage change in FCFE in Year 2 from Year 1? Please give your answer in Percentage up to 2 places of Decimal without giving the % sign.
Suppose Alcatel-Lucent has an equity cost of capital of 10.3%, market capitalization of $9.36 billion, and an enterprise value of $13 billion. Assume that Alcatel-Lucent's debt cost of capital is 7.3%, its marginal tax rate is 34%, the WACC is 8.7650%, and it maintains a constant debt-equity ratio. The firm has a project with average risk. The expected free cash flow, levered value, and debt capacity are as follows: Thus, the NPV of the project calculated using the WACC method is $182.73 million - $100 million = $82.73 million. a. What is Alcatel-Lucent's unlevered cost of capital? b. What is the unlevered value of the project? c. What are the interest tax shields from the project? What is their present value? d. Show that the APV of Alcatel-Lucent's project matches the value computed using the WACC method. a. What is Alcatel-Lucent's unlevered cost of capital? Alcatel-Lucent's unlevered cost of capital is%. (Round to four decimal places.) Data table (Click on the following icon in…
A company has determined that its optimal capital structure consists of 40 percent debt and 60 percent equity.Given the following information, calculate the firm's cost of capital (WACC).rd= 7%, Tax rate = 40%, P0 = $20, Growth = 0%, D0 =$2.00
Ramos Berhad has the following capital structure which it considers optimal: Debt-30%, PS-18%, CS-52%. The Firm paid a dividend of RM2/share last year and its stock currently sells at RM80/share. Tax rate is 35% and investors expect earnings and dividends to grow at a constant rate of 12% in the future. New CS have a flotation cost of 10%. New PS would be sold at RM100/share with a dividend of RM9. Flotation cost is RM6/share. For Debt, it is a 9% irredeemable debt with a current value of RM1,100. Annual interest payment has just been made. What is the weighted average after-tax costs of capital of the company?

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