Financial Management: Theory & Practice
16th Edition
ISBN: 9781337909730
Author: Brigham
Publisher: Cengage
expand_more
expand_more
format_list_bulleted
Concept explainers
Textbook Question
Chapter 15, Problem 16SP
Start with the partial model in the file Ch15 P13 Build a Model.xlsx on the textbook’s Web site. Reacher Technology has consulted with investment bankers and determined the interest rate it would pay for different capital structures, as shown in the following table. Data for the risk-free rate, the market risk premium, an estimate of Reacher’s unlevered beta, and the tax rate are also shown. Reacher expects zero growth. Based on this information, what is the firm’s optimal capital structure, and what is the weighted average cost of capital at the optimal structure?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
A number of investment projects are under consideration at your company. You've calculated the cost of capital based on market values and rates, and analyzed the projects using IRR and NPV. Several projects are marginally acceptable. While watching the news last night you learned that most economists predict a rise in interest rates over the next year. Should you modify your analysis in light of this information? Why?
Your firm is planning to invest in an automated packaging plant. Harburtin Industries is an all-equity firm that specializes in this business. Suppose Harburtin's equity beta is 0.77, the risk-free rate is
3%, and the market risk premium is 4%.
a. If your firm's project is all-equity financed, estimate its cost of capital.
After computing the project's cost of capital, you decided to look for other comparables to reduce estimation error in your cost of capital estimate. You find a second firm, Thurbinar Design, which is
also engaged in a similar line of business. Thurbinar has a stock price of $19 per share, with 16 million shares outstanding. It also has $114 million in outstanding debt, with a yield on the debt of
4.8%. Thurbinar's equity beta is 1.
b. Assume Thurbinar's debt has a beta of 0. Estimate Thurbinar's unlevered beta. Use the unlevered beta and the CAPM to estimate Thurbinar's unlevered cost of capital.
c. Estimate Thurbinar's equity cost of capital using the CAPM. Then…
Conglomco has a beta of 0.32. If the market
return is expected to
be 12 percent and the risk-free rate is 5 percent,
what is Conglomco's required return? Use the
capital asset pricing model (CAPM) to calculate
Conglomco's required return.
Chapter 15 Solutions
Financial Management: Theory & Practice
Ch. 15 - Prob. 1QCh. 15 - What term refers to the uncertainty inherent in...Ch. 15 - Firms with relatively high nonfinancial fixed...Ch. 15 - “One type of leverage affects both EBIT and EPS....Ch. 15 - Why is the following statement true? Other things...Ch. 15 - Why do public utility companies usually have...Ch. 15 - Why is EBIT generally considered to be independent...Ch. 15 - If a firm went from zero debt to successively...Ch. 15 - Prob. 9QCh. 15 - Prob. 1P
Ch. 15 - Counts Accountings beta is 1.2 and its tax rate is...Ch. 15 - Ethier Enterprise has an unlevered beta of 1.0....Ch. 15 - Quillpen Company is unlevered and has a value of...Ch. 15 - Walkrun Inc. is unlevered and has a value of 400...Ch. 15 - Cruz Corporation has 100 billion of debt...Ch. 15 - Nichols Corporations value of operations is equal...Ch. 15 - Lee Manufacturings value of operations is equal to...Ch. 15 - Dye Trucking raised $150 million in new debt and...Ch. 15 - Schweser Satellites Inc. produces satellite earth...Ch. 15 - The Rivoli Company has no debt outstanding, and...Ch. 15 - Pettit Printing Company (PPC) has a total market...Ch. 15 - Beckman Engineering and Associates (BEA) is...Ch. 15 - F. Pierce Products Inc. is considering changing...Ch. 15 - A. Fethe Inc. is a custom manufacturer of guitars,...Ch. 15 - Start with the partial model in the file Ch15 P13...Ch. 15 - Assume you have just been hired as a business...Ch. 15 - Prob. 2MCCh. 15 - Prob. 3MCCh. 15 - To illustrate the effects of financial leverage...Ch. 15 - What happens to ROE for Firm U and Firm L if EBIT...Ch. 15 - What does capital structure theory attempt to do?...Ch. 15 - Prob. 7MCCh. 15 - Liu Industries is a highly levered firm. Suppose...Ch. 15 - How do companies manage the maturity structure of...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Your firm is planning to invest in an automated packaging plant. Harburtin Industries is an all-equity firm that specializes in this business. Suppose Harburtin's equity beta is 0.83, the risk-free rate is 5%, and the market risk premium is 5%. a. If your firm's project is all-equity financed, estimate its cost of capital. After computing the project's cost of capital you decided to look for other comparables to reduce estimation error in your cost of capital estimate. You find a second firm, Thurbinar Design, which is also engaged in a similar line of business. Thurbinar has a stock price of $24 per share, with 15 million shares outstanding. It also has $104 million in outstanding debt, with a yield on the debt of 4.8%. Thurbinar's equity beta is 1.00. b. Assume Thurbinar's debt has a beta of zero. Estimate Thurbinar's unlevered beta. Use the unlevered beta and the CAPM to estimate Thurbinar's unlevered cost of capital. c. Estimate Thurbinar's equity cost of…arrow_forward(Capital asset pricing model) Anita, Inc. is considering the following investments. The current rate on Treasury bills is 6 percent, and the expected return for the market is 14 percent. Using the CAPM, what rates of return should Anita require for each individual security? Stock H T P W (Click on the icon in order to copy its contents into a spreadsheet.) Beta 0.92 1.63 0.87 1.17 a. The expected rate of return for security H, which has a beta of 0.92, is%. (Round to two decimal places.)arrow_forward(Capital Asset Pricing Model) Johnson Manufacturing, Inc., is considering several investments. The rate on Treasury bills is currently 7.5 percent, and the expected return for the market is 10.5 percent. What should be the expected rate of return for each investment (using the CAPM)? Security A B C D Beta 1.62 1.02 0.71 1.34 a. The expected rate of return for security A, which has a beta of 1.62, is%. (Round to two decimal places.)arrow_forward
- Use the basic equation for the capital asset pricing model (CAPM) to work each of the following problems. a. Find the required return for an asset with a beta of 1.65 when the risk-free rate and market return are 8% and 14%, respectively. b. Find the risk-free rate for a firm with a required return of 11.366% and a beta of 1.29 when the market return is 10%. c. Find the market return for an asset with a required return of 7.711% and a beta of 0.89 when the risk-free rate is 4%. d. Find the beta for an asset with a required return of 6.552% when the risk-free rate and market return are 6% and 8.4%, respectively.arrow_forwardUse the basic equation for the capital asset pricing model (CAPM) to work each of the following problems. a. Find the required return for an asset with a beta of 1.63 when the risk-free rate and market return are 5% and 13%, respectively. b. Find the risk-free rate for a firm witha required return of 14.363% and a beta of 1.07 when the market return is 14%. C. Find the market return for an asset with a required return of 9.045% and a beta of 1.57 when the risk-free rate is 3%. d. Find the beta for an asset with a required return of 10.255% when the risk-free rate and market return are 6% and 9.7%, respectively. a. The required return for an asset with a beta of 1.63 when the risk-free rate and market return are 5% and 13%, respectively, is %.arrow_forwardYour firm is planning to invest in an automated packaging plant. Harburtin Industries is an all-equity firm that specializes in this business. Suppose Harburtin's equity beta is 0.81, the risk-free rate is 4.1%, and the market risk premium is 5.4%. If your firm's project is all-equity financed, estimate its cost of capital.arrow_forward
- You have been given the following information: The required return of the market is 14.5% The risk free rate is 3.5% The beta for your investment is .95 Required: Calculate the required rate of return for your investment, with the above data Assume that that the beta for the investment is 1.95 calculate the new required rate of return for your investment.arrow_forwardhi there tutors. im here to cure my doubts. i hv ques to ask. please help solve. investment management Required: Based on Table 2, compute the betas for portfolios A and B. Based on Table 2, by using the annual returns, determine which portfolio youwould choose and explain why? What is the yield (internal rate of return, IRR) on an investment costing RM2,000 todaythat you expect will be worth RM2,500 at the end of 5 year holding period? thats all. thank you tutor!arrow_forwardUse the basic equation for the CAPM to rework each of the following problems for above case. Case A) Find the required return for an asset with a beta of 0.9 when the risk-free rate and market return are 8% and 12% respectively. Case B) Find the risk-free rate for a firm with a required return of 15% and a beta of 1.25 when the market return is 14%. Case C) Find the market return for an asset with a required return of 16% and a beta of 1.1 when the risk-free rate is 9%. Case D) Find the beta for an asset with a required return of 15% when the risk-free rate and market return are 10% and 12.5% respectively.arrow_forward
- QUESTIONS: 1) Assuming that the risk-free rate of return is currently 3,2%, the market risk premium is 6% whereas the beta of HelloFresh SH. stock is 1.8, compute the required rate of return using CAPM. 2) Compute the value of each investment based on your required rate of return and interpret the results comparing with the market values. 3) Which investment would you select? Explain why using appropriate financial jargon (language). 4) Assume HelloFresh SH's CFO Mr. Christian Gaertner expects an earnings upturn resulting increase in growth (rate) of 1%. How does this affect your answers to Question 2 and 3? 5) AACSB Critical Thinking Questions: A) Companies pay rating agencies such as Moody's and S&P to rate their bonds, and the costs can be substantial. However, companies are not required to have their bonds rated in the first place; doing so is strictly voluntary. Why do you think they do it? (Textbook page: 198) B) What are the difficulties in using the PE ratio to value stock?…arrow_forwardPlease show how to solve this Consider the REIT valuation spreadsheet presented in class. For each of the following scenarios, and all other things equal, determine whether each scenario will increase, decrease or won’t affect the probability that new investors will achieve their levered required rate of return. a. A distribution is defined for NOI growth rate, where the average value remains the same, but the right “tail” of the distribution is longer than the left “tail”. b. The quality adjustment value is lower.c. The risk premium is lower.d. The current market cap is higher.e. The price of the REIT is lower.f. The projected 10-year treasury rate is higher.arrow_forwardPlease fast help me please with this one, in text fastarrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Capital Budgeting Introduction & Calculations Step-by-Step -PV, FV, NPV, IRR, Payback, Simple R of R; Author: Accounting Step by Step;https://www.youtube.com/watch?v=hyBw-NnAkHY;License: Standard Youtube License