You operate an all-equity financed company in perfect markets and generate earnings beforeinterest and tax of $350 comma 000. Your firm has just sold $1.6 million worth of 5.5% couponrate bonds and plans to use the proceeds to buy back outstanding shares of stock. Your firm'sindustry requires a 10.75% ROA. a. Calculate the market price and required return for your firm'sstock just prior to the repurchase. b. Calculate the market price and required return for your firm'sstock just after the repurchase?

Part a: Calculate the market value and required return for the firm's stock just prior to the…

Answered: You operate an all-equity financed…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter12: The Cost Of Capital

Section: Chapter Questions

Problem 7P

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A company needed ghc 1000 to finance its activities. The firm can financed this expenditure either by bonds or equity. Interest rate on bonds is 10%. The company can earn ghc 160 in good years and ghc80 in bad years. Assuming the firm faces equal probability of good and bad years; i What will be the stream of returns on both bonds and equity if the company chooses the following financing options a 100% equity financing b 50% equity financing c 20% equity financing d 0% equity financing ii Estimate the equity risk associated with each option in (i) iii As an investor who wants to purchase a share in the company, which financing option will make you purchase the stock. Why????
A company needs ghc1000 to finance its activities. The firm can finance this expenditure either by bonds or equity. Interest rate on bonds is 10%. The company can earn ghe 160 in good years and ghc80 in bad years. Assuming the firm faces one-quarter probability of good years; What will be the stream of returns on both bonds and equity if the company chooses the following financing options? i. a. 100% equity financing ii. 50% equity financing iii. 20% equity financing iv. 0% equity financing Estimate the equity risk associated with each option in (a) As an investor who wants to purchase a share in the company, which financing option will make you purchase the stock. Why? b. C.
The company you work for wants you to estimate the company’s WACC; but before you do so, you need to estimate the cost of debt and equity. You have obtained the following info. 1) the firms non-callable bonds mature in 20 years, have an 8.00% annual coupon, a par value of $1,000 and a market price of $1,225.00. 2) thecompany’s tax rate is 40%. 3) the risk-free rate is 4.50%, the market risk premium 5.50%, and the stocks betta is 1.20. 4) the target capital structure consists of 35% debt and the balance common equity. The firm uses the CAPM to estimate the cost of equity, and it does not expect to issue any new common stock. Calculate the company’s cost of retained earnings using the CAPM approach.
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The company you work for wants you to estimate the company’s WACC; but before you do so, you need to estimate the cost of debt and equity. You have obtained the following info. 1) the firms non-callable bonds mature in 20 years, have an 8.00% annual coupon, a par value of $1,000 and a market price of $1,225.00. 2) the company’s tax rate is 40%. 3)the risk-free rate is 4.50%, the market risk premium is 5.50%, and the stocks beta is 1.20. 4) the target capital structure consists of 35% debt and the balance is common equity. The firm uses the CAPM to estimate the cost of equity, and it does not expect to issue any common stock. WHAT is the WACC?
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Mackenzie Company has a price of $37 and will issue a dividend of $2.00 next year. It has a beta of 1.2, the risk-free rate is 5.4%, and the market risk premium is estimated to be 4.8%. a. Estimate the equity cost of capital for Mackenzie. b. Under the CDGM, at what rate do you need to expect Mackenzie's dividends to grow to get the same equity cost of capital as in part (a)? a. Estimate the equity cost of capital for Mackenzie. The equity cost of capital for Mackenzie is %. (Round to two decimal places.) b. Under the CGDM, at what rate do you need to expect Mackenzie's dividends to grow to get the same equity cost of capital as in part (a)? The expected growth rate for dividends is | %. (Round to two decimal places.)
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A group of investors is intent on purchasing a publicly traded company and wants to estimate the highest price they can reasonably justify paying. The target company’s equity beta is 1.20 and its debt-to-firm value ratio, measured using market values, is 60 percent. The investors plan to improve the target’s cash flows and sell it for 12 times free cash flow in year five. Projected free cash flows and selling price are as follows. ($ millions) Year 1 2 3 4 5 Free cash flows $38 $53 $58 $63 $ 63 Selling price $ 756 Total free cash flows $38 $53 $58 $63 $ 819 To finance the purchase, the investors have negotiated a $530 million, five-year loan at 8 percent interest to be repaid in five equal payments at the end of each year, plus interest on the declining balance. This will be the only interest-bearing debt outstanding after the acquisition. Selected Additional Information Tax rate 40 percent Risk-free interest rate 3 percent Market risk…

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