Loose Leaf for Foundations of Financial Management Format: Loose-leaf
17th Edition
ISBN: 9781260464924
Author: BLOCK
Publisher: Mcgraw Hill Publishers
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Chapter 11, Problem 27P
Delta Corporation has the following capital structure:
a. If the firm has
b. The 8.1 percent cost of debt referred to earlier applies only to the first
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Assume that your company is trying to determine its optimal capital structure, which consists only of
debt and common stock. To estimate the cost of debt, the company has produced the following
table:
09.86%
9.56%
Percent Financed
With Debt
10.16%
8.96%
9.26%
0.10
0.20
0.30
0.40
0.50
Percent Financed
With Equity
0.90
0.80
0.70
0.60
0.50
Debt/Equity
Ratio
Now assume that the company's tax rate is 40 percent, that the company uses the CAPM to
estimate its cost of common equity, Ks, that the risk-free rate is 5 percent and the market risk
premium is 6 percent. Finally assume that if it has no debt its WACC would be equal to its cost of
equity which would be equal to 11 percent (you should now be able to determine its "unlevered
beta," bu).
0.10/0.90 0.11
0.20/0.80 0.25
Given this information, determine the firm's cost of capital if it finances with 40 percent debt and 60
percent equity.
0.30/0.70=0.43
0.40/0.600.67
0.50/0.50 = 1.00
Bond
Rating
AA
A
A
BB
B
Before-Tax
Cost of Debt
7.0%
7.2%…
You have the following data for your company.
Market Value of Equity: $520
Book Value of Debt: $130
Required rate of return on equity: 12%
Required rate of return on debt (pre-tax): 7%
Corporate tax rate: 25%
The company's debt is assumed to be is reasonably safe, so the book value of debt is a reasonably approximation for the market value of debt.
What is the weighted average cost of capital for this company?
What is the solution and working
Chapter 11 Solutions
Loose Leaf for Foundations of Financial Management Format: Loose-leaf
Ch. 11 - Why do we use the overall cost of capital for...Ch. 11 - How does the cost of a source of capital relate to...Ch. 11 - Prob. 3DQCh. 11 - Why is the cost of debt less than the cost of...Ch. 11 - What are the two sources of equity (ownership)...Ch. 11 - Explain why retained earnings have an associated...Ch. 11 - Why is the cost of retained earnings the...Ch. 11 - Why is the cost of issuing new common stock Kn...Ch. 11 - How are the weights determined to arrive at the...Ch. 11 - Explain the traditional, U-shaped approach to the...
Ch. 11 - Prob. 11DQCh. 11 - What effect would inflation have on a company’s...Ch. 11 - What is the concept of marginal cost of capital?...Ch. 11 - In March 2010, Hertz Pain Relievers bought a...Ch. 11 - Speedy Delivery Systems can buy a piece of...Ch. 11 - Prob. 3PCh. 11 - Prob. 4PCh. 11 - Calculate the aftertax cost of debt under each of...Ch. 11 - Prob. 6PCh. 11 - Prob. 7PCh. 11 - Prob. 8PCh. 11 - Airborne Airlines Inc. has a $1,000 par value bond...Ch. 11 - Russell Container Corporation has a $1,000 par...Ch. 11 - Prob. 11PCh. 11 - KeySpan Corp. is planning to issue debt that will...Ch. 11 - Medco Corporation can sell preferred stock for $90...Ch. 11 - Wallace Container Company issued $100 par value...Ch. 11 - Prob. 15PCh. 11 - Murray Motor Company wants you to calculate its...Ch. 11 - Compute KeandKn under the following...Ch. 11 - Business has been good for Keystone Control...Ch. 11 - Prob. 19PCh. 11 - Evans Technology has the following capital...Ch. 11 - Sauer Milk Inc. wants to determine the minimum...Ch. 11 - Given the following information, calculate the...Ch. 11 - Prob. 23PCh. 11 - Brook's Window Shields Inc. is trying to calculate...Ch. 11 - Prob. 25PCh. 11 - Prob. 26PCh. 11 - Delta Corporation has the following capital...Ch. 11 - The Nolan Corporation finds it is necessary to...Ch. 11 - The McGee Corporation finds it is necessary to...Ch. 11 - Eaton Electronic Company’s treasurer uses both...Ch. 11 - Compute the $ change in “Total Assets� over...Ch. 11 - Do the same computation for “Stockholders’...Ch. 11 - Do the same computation for “Long-Term Debt.�Ch. 11 - Prob. 5WE
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