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WACC Nevada Hydro is 40% debt-financed and has a weighted-average cost of capital of 10.2%:
Goldensacks Company is advising Nevada Hydro to issue $75 million of
Goldensacks argues that these transactions would reduce Nevada Hydro’s WACC to 9.84%:
Do you agree with this calculation? Explain.
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Chapter 19 Solutions
PRIN.OF CORPORATE FINANCE
- The following was collected with regards to Blue Co.: · The capital structure is 60% equity funded.· The company anticipates that it will need to raise new ordinary shares for this year. Total flotation costs will be equal to the 7.5% of the amount issued.· The yield to maturity of the company’s bonds is 9%.· Applicable tax rate is 30%.· The year-end dividend is forecasted to be P0.25 per share.· The firm expects that its dividend will grow yearly at a constant rate of 3%.· The company’s ordinary share price is P32. What is the weighted cost of debt?arrow_forwardParanto company has the following Capital structure: 50% equity, 30% debt; and 20% preferred stock. Their cost of equity has been calculated as 12%, cost of preferred stock is 5% and their after- tax cost of debt is 4% What is the company's weighted average cost of capital? A. 12% B. 8.60% C. 8.20% D. 12.02%arrow_forwardFlaherty Electric has a capital structure that consists of 70 percent equity and 30 percent debt. The company’s long-term bonds have a before-tax yield to maturity of 8.4 percent. The company uses the DCF approach to determine the cost of equity. Flaherty’s common stock currently trades at RM40.50 per share. The year-end dividend (D1) is expected to be RM2.50 per share, and the dividend is expected to grow forever at a constant rate of 7 percent a year. The company estimates that it will have to issue new common stock to help fund this year’s projects. The company’s tax rate is 40 percent. What is the company’s weighted average cost of capital, WACC?arrow_forward
- Johnson Industries has a target capital structure that consists of 40 percent debt, 10 percent preferred stock, and 50 percent common stock. · The company can issue bonds at a yield to maturity of 7.5 percent. · The cost of preferred stock is 7 percent. · The company's common stock currently sells for $34 a share. · The company's dividend has just paid $2.00 a share (D0 = $2.00), and is expected to grow at a constant rate of 5 percent per year. · Assume that the flotation cost on debt and preferred stock is zero, and no new stock will be issued. · The company's tax rate is 30 percent. What is the company's weighted average cost of capital (WACC)? Express your answer in percentage (without the % sign) and round it to two decimal places.arrow_forwardHook Industries capital structure consists solely of debt and common equity. It can issue debt at rd 5 11%, and its common stock currently pays a $2.00 dividend per share (D0 5 $2.00). The stock’s price is currently $24.75, its dividend is expected to grow at a constant rate of 7% per year, its tax rate is 35%, and its WACC is 13.95%. What percentage of the company’s capital structure consists of debt?arrow_forwardJames Madison Ltd. expects a net income of 200,000. The company has 5% of 1,000,000 bonds payable. The equity capitalization rate of the company is 20%. (a) Calculate the value of the firm and average cost of capital according to the net income approach (ignoring income tax).arrow_forward
- Chearrow_forwardc) Plummer Premium Products Ltd has 13 million shares in issue at a current market price of $12.50 per share. The company's equity beta is 1.05, the riskfree rate of return is 3% and the market risk premium is 6%. The company has $50 million nominal 7% debt with four years to maturity which is trading at face value. If the company's tax rate is 32%, calculate the after tax weighted average cost of capital for the company.arrow_forwardSouthern Corporation has a capital structure of 40% debt and 60 % common equity. This capital structure is expected not to change. The firm's tax rate is 21%. The firm can issue the following securities to finance capital investments: Debt: Capital can be raised through bank loans at a pretax cost of 6.7%. Also, bonds can be issued at a pretax cost of 8.2%. D Common Stock: Retained earnings will be available for investment. In addition, new common stock can be issued at the market price of $74. Flotation costs will be $4 per share. The recent common stock dividend was $4,33. Dividends are expected to grow at 4% in the future. What is the cost of external equity? PLEASE INPUT THE ANSWER IN PERCENT ROUNDING IT TO 2 DECIMALS. DO NOT INCLUDE % SIGN, E.G.. INSTEAD OF 9.9922% INPUT 9.99arrow_forward
- The return on assets for Super Express Ltd is 12.3% pa. Currently the capital structure for Super Express Ltd is 100% equity but management are considering issuing debt. Super Express Ltd has 34,400 shares on offer at a current price of $5.78 per share. Management wishes to issue enough debt capital to repurchase 35% of existing shares at the current share price. a)Calculate the amount of debt that the management of Super Express will be issuing. Give your answer in dollars to the nearest dollar. Debt issued = $ b)Calculate the debt to equity (leverage) ratio of Super Express Ltd after the debt issue. Give your answer rounded to 2 decimal places. Debt to equity ratio =arrow_forwardXYZ Company has an existing capital structure mix of Debt 35%, preferred stock 15% and Common Stock 50%. a) Calculate Cost of Debt, if the cost of debt is 6% (effective rate) and its tax rate is 40% then what is the after-tax cost of debt? b) Calculate the Cost of preferred stock, if the market price for preferred stock is $100 per share, with a stated dividend of $10. c) Calculate Cost of Equity if Beta is 1.5 and the risk-free rate on a treasury bill is currently 5% and the market return has averaged 10%. d) Calculate Weighted Average Cost of capital for XYZ Companyarrow_forwardеВook Pearson Motors has a target capital structure of 35% debt and 65% common equity, with no preferred stock. The yield to maturity on the company's outstanding bonds is 9%, and its tax rate is 25%. Pearson's CFO estimates that the company's WACC is 10.10%. What is Pearson's cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places.arrow_forward
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT