Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Chapter 11, Problem 8P
Summary Introduction
To determine: Company’s
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WACC
David Ortiz Motors has a target capital structure of 30% debt and 70% equity. The yield to maturity on the company's outstanding bonds is 12%, and the company's
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number.
David Ortiz Motors has a target capital structure of 40% debt and 60% equity. The yield to maturity of its outstanding long-term debt securities is 9% and its tax rate is 40%. Ortiz's CFO calculated the company's WACC to be 9.96%. Based on the information, what is the company's cost of equity?
David Ortiz Motors has a target capital structure of 40% debt and 60% equity. The yield to maturity on the company's outstanding bonds is 7%, and the company's tax rate is 25%. Ortiz's CFO has calculated the company's WACC as 9.3%. What is the company's cost of equity capital? Round your answer to the nearest whole number.
%
Chapter 11 Solutions
Intermediate Financial Management (MindTap Course List)
Ch. 11 - Define each of the following terms:
Weighted...Ch. 11 - Prob. 2QCh. 11 - Prob. 3QCh. 11 - Distinguish between beta (i.e., market) risk,...Ch. 11 - Suppose a firm estimates its overall cost of...Ch. 11 - 11-1 After-Tax Cost of Debt
Calculate the...Ch. 11 - Prob. 2PCh. 11 - Cost of Preferred Stock
Duggins Veterinary...Ch. 11 - Prob. 4PCh. 11 - Prob. 5P
Ch. 11 - Prob. 6PCh. 11 - Prob. 7PCh. 11 - Prob. 8PCh. 11 - Bond Yield and After-Tax Cost of Debt A companys...Ch. 11 - Prob. 10PCh. 11 - Prob. 11PCh. 11 - Calculation of gL and EPS Spencer Suppliess stock...Ch. 11 - The Cost of Equity and Flotation Costs
Messman...Ch. 11 - Prob. 14PCh. 11 - WACC Estimation
On January 1, the total market...Ch. 11 - Prob. 16PCh. 11 - During the last few years, Jana Industries has...Ch. 11 - What is the market interest rate on Jana’s debt,...Ch. 11 - Prob. 3MCCh. 11 - Prob. 4MCCh. 11 - Prob. 5MCCh. 11 - Prob. 6MCCh. 11 - Prob. 7MCCh. 11 - Prob. 8MCCh. 11 - Prob. 9MCCh. 11 - Prob. 10MCCh. 11 - What procedures can be used to estimate the...Ch. 11 - Prob. 12MCCh. 11 - Prob. 13MCCh. 11 - Prob. 14MCCh. 11 - What four common mistakes in estimating the WACC...
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- RM Motors has a target capital structure of 40% debt and 60% equity. The yield to maturity on the company’s outstanding bonds is 9%, and the company’s tax rate is 40%. It has been calculated that company’s WACC is 9.96%. What is the company’s cost of equity capital?arrow_forwardA company has determined that its optimal capital structure consists of 34 percent debt and the rest is equity. Given the following information, calculate the firm's weighted average cost of capital. Rd = 7.8%; Tax rate = 28 %: Po = $ 39.01; Growth = 5.1%; and D1 = $ 1.02. Show your answer to the nearest .1% Your Answer: Answerarrow_forwardTRU Inc. desires to maintain a capital structure of 90% equity and 10% debt. They currently have an effective tax rate of 40%. The company's cost of equity capital is 10%. To obtain their debt financing, they issue bonds with an interest rate of 15%. What is the company's weighted average cost of capital? A. 14.5% B. 9.9% C. 9.1% O D. 10.5%arrow_forward
- If Bulldogs Inc. pays taxes at the rate of 40%, what is the firm’s weighted average cost of capital? (In percentage, type the percentage sign on your answer)arrow_forwardTarrah, Inc. has a target capital structure of 40% debt and 60% common equity. If the firm's after-tax cost of debt is 4.5% and investors require a 15% return on the firm's common stock, what is the firm's weighted average cost of capital? OA. 10.80% OB.7.20% OC. 12.00% OD. 12.25% OE. None of the above.arrow_forwardA 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 weighted average cost of capital (WACC). Assume external equity for cost of equity calculation. rd before Tax = 8% , Tax = 40% , P0 = $40, Growth = 6% , D0 = $3.00, Flotation cost = 7% of market pricearrow_forward
- ABC Inc. desires to maintain a capital structure of 80% equity and 20% debt. They currently have an effective tax rate of 30%. The company’s cost of equity capital is 12%. To obtain their debt financing, they issue bonds with an interest rate of 10%. What is the company’s weighted average cost of capital? a.8.0% b.11.0% c.11.6% d.10.4%arrow_forwardK. Bell Jewelers wishes to explore the effect on its cost of capital of the rate at which the company pays taxes. The firm wishes to maintain a capital structure of 30% debt, 20% preferred stock, and 50% common stock. The cost of financing with retained earnings is 13% the cost of preferred stock financing is 9%, and the before-tax cost of debt financing is 7%. Calculate the weighted average cost of capital (WACC) given a tax rate of 21%.arrow_forwardA 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 =$2.00arrow_forward
- The L Corp. has determined that its optimal capital structure consists of 40 percent debt and 60 percent equity. Calculate the firm’s weighted average cost of capital (WACC). Assume external equity for cost of equity calculation. rd before Tax = 8% , Tax = 40% , P0 = $40, Growth = 6% , D0 = $3.00, Flotation cost = 7% of market price 10.64% 13.05% 7.24% 8.61% 9.83%arrow_forwardK. Bell Jewelers wishes to explore the effect on its cost of capital of the rate at which the company pays taxes. The firm wishes to maintain a capital structure of 30% debt, 20% preferred stock, and 50% common stock. The cost of financing with retained earnings is 13%, the cost of preferred stock financing is 8%, and the before-tax cost of debt financing is 6%. Calculate the weighted average cost of capital (WACC) given a tax rate ofarrow_forwardWhy Max Solutions's target capital structure calls for 40 percent debt, 10 percent preferred stock, and 50 percent common equity. WMS's current after-tax cost of debt is 6 percent, and it can sell as much debt as it wishes at this rate. The firm's cost of preferred stock is 11 percent, and its cost of retained earnings is 14 percent. The firm expects to generate $15,000 in retained earnings this year. A. Compute the weighted average cost of capital (WACC) if Why Max Solutions will rely only on Retained Earnings for the projected new year B. Should the firm exhaust its retained earnings, what will be the (WACC) breakpoint associated with raising funds through the issuance of new common stock? O 11.5%, $150,000 O 10%, $16,500 10.5%, $30,000 O 11%, $37,500arrow_forward
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