Financial Management: Theory & Practice
16th Edition
ISBN: 9781337909730
Author: Brigham
Publisher: Cengage
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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?
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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…
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...
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