entworth Industries is 100 percent equity financed. Its current beta is 1.1. The expected market rate of return is 16 percent and the risk-free rate is 11 percent. Round your answers to two decimal places. Calculate Wentworth’s cost of equity. % If Wentworth changes its capital structure to 20 percent debt, it estimates that its beta will increase to 1.3. The after-tax cost of debt will be 10 percent. Should Wentworth make the capital structure change? Based on the weighted cost of capital of %, the capital stru

entworth Industries is 100 percent equity financed. Its current beta is 1.1. The expected market rate of return is 16 percent and the risk-free rate is 11 percent. Round your answers to two decimal places. Calculate Wentworth’s cost of equity. % If Wentworth changes its capital structure to 20 percent debt, it estimates that its beta will increase to 1.3. The after-tax cost of debt will be 10 percent. Should Wentworth make the capital structure change? Based on the weighted cost of capital of %, the capital stru

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter12: The Cost Of Capital

Section: Chapter Questions

Problem 7P

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Hello. I need help with the following question please. Wentworth Industries is 100 percent equity financed. Its current beta is 0.6. The expected market rate of return is 17 percent and the risk-free rate is 9 percent. Round your answers to two decimal places. Calculate Wentworth’s cost of equity. If Wentworth changes its capital structure to 20 percent debt, it estimates that its beta will increase to 0.8. The after-tax cost of debt will be 9 percent. Should Wentworth make the capital structure change? Based on the weighted cost of capital of %, the capital structure changed.
Laiba Corporation (LC) is considering a large-scale recapitalization. Currently, LC is financed with 100 percent equity. The beta on its common stock at the current level is 1.25, the risk free rate is 8 percent, the market return is 14 percent, and LIC faces a 40 percent federal-plus-state tax rate. Required: What is LIC’s current cost of equity? What is LIC’s unlevered beta? If the company wants to recapitalize its capital structure, increase its debt by 30% and 70% equity. What will be the new beta and new cost of equity if LC recapitalizes? What if the company recapitalize its capital structure to 50% debt and equity, what will be new beta and new cost of equity?
Simon Software Co. is trying to estimate its optimal capital structure. Right now, Simon has a capital structure that consists of 20 percent debt and 80 percent equity, based on market values. (Its D/S ratio is 0.25.) The risk-free rate is 6 percent and the market risk premium, rM - rRF, is 5 percent. Currently the company's cost of equity, which is based on the CAPM, is 12 percent and its tax rate is 40 percent. Find the new levered beta given the new capital structure (if it were to change its capital structure to 50 percent debt and 50 percent equity) using the Hamada equation. O 1.67 O 0.81 O 1.00 O 1.22 O 1.45
Kohwe Corporation plans to issue equity to raise $50.7 million to finance a new investment. After making the investment, Kohwe expects to earn free cash flows of $10.4 million each year. Kohwe's only asset is this investment opportunity. Suppose the appropriate discount rate for Kohwe's future free cash flows is 7.7%, and the only capital market imperfections are corporate taxes and financial distress costs. a. What is the NPV of Kohwe's investment? b. What is the value of Kohwe if it finances the investment with equity? a. What is the NPV of Kohwe's investment? The NPV of Kohwe's investment is $ million. (Round to two decimal places.) b. What is the value of Kohwe if it finances the investment with equity? The Kohwe finances stment with equity $ million. (Round decimal places.)
9. Determining the optimal capital structure Aa Aa Understanding the optimal capital structure Review this situation: Universal Exports Inc. is trying to identify its optimal capital structure. Universal Exports Inc. has gathered the following financial information to help with the analysis. Debt Ratio Equity Ratio rd rs WACC 30% 70% 7.00% 10.50% 8.61% 40% 60% 7.20% 10.80% 8.21% 50% 50% 7.70% 11.40% 8.01% 60% 40% 8.90% 12.20% 8.08% 70% 30% 10.30% 13.50% 8.38% Which capital structure shown in the preceding table is Universal Exports Inc.'s optimal capital structure? Debt ratio = 40%; equity ratio = 60% Debt ratio 50%; equity ratio = 50% Debt ratio = 70%; equity ratio 30% Debt ratio = 30%; equity ratio = 70% Debt ratio = 60%; equity ratio = 40% Consider this case: Globo-Chem Co. is an all-equity firm, and it has a beta of 1. It is considering changing its capital structure to 65% equity and 35% debt. The firm's cost of debt will be 8%, and it will face a tax rate of 40%.
Now consider the case of another company: U.S. Robotics Inc. has a current capital structure of 30% debt and 70% equity. Its current before-tax cost of debt is 6%, and its tax rate is 45%. It currently has a levered beta of 1.15. The risk-free rate is 3.5%, and the risk premium on the market is 7.5%. U.S. Robotics Inc. is considering changing its capital structure to 60% debt and 40% equity. Increasing the firm's level of debt will cause its before-tax cost of debt to increase to 8%. Use the Hamada equation to unlever and relever the beta for the new level of debt. What will the firm's weighted average cost of capital (WACC) be if it makes this change in its capital structure? (Hint: Do not round intermediate calculations.) Which of the following statements regarding a firm's optimal capital structure are true? Check all that apply. The optimal capital structure maximizes the firm's stock price. The optimal capital structure maximizes the firm's EPS. The optimal capital structure…
You are going to value Lauryn's Doll Co. using the FCF model. After consulting various sources, you find that Lauryn's has a reported equity beta of 1.7, a debt-to-equity ratio of 0.7, and a tax rate of 20 percent. Based on this information, what is the asset beta for Lauryn's? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Lauryn's asset beta
Globex Corp. is an all-equity firm, and it has a beta of 1. It is considering changing its capital structure to 60% equity and 40% debt. The firm's cost of debt will be 6%, and it will face a tax rate of 25%. What will Globex Corp.'s beta be if it decides to make this change in its capital structure? Now consider the case of another company: US Robotics Inc. has a current capital structure of 30% debt and 70% equity. Its curre is 25%. It currently has a levered beta of 1.15. The risk-free rate is 3.5%, and the risk 1.65 1.58 1.80 1.50 e-tax cost of debt is 6%, and its tax rate m on the market is 7.5%. US Robotics
You are considering a project that will cost $50,000 to set up, and will pay out $18,000 1,2,3 and 4 years from today. The unlevered beta for this project is 1.2, the risk free rate is 6.5%, and the expected return on the S&P 500 is 15%. Corporate taxes are 25%. a. What is the unlevered cost of equity for this project? b. What is the NPV of this project if you finance with all equity? c. You are considering borrowing $30,000 to finance this project, with repayment in 4 years. You could normally borrow at 7.5%. The Nebraska state government has offered to lend you the money at 6%. What is the adjusted present value of this project if you take the subsidized loan?
A firm will earn a taxable net return of $500 million next year. If it took on debt today, it would have to pay creditors\varepsilon(rDebt) = 5% + 10% x wDebt2. Thus, if the firm has 100% debt, the financial markets would demand 15% expected rate of return. Further, assume that the financial markets will lend the firm capital at this overall net cost of 15%, regardless of how the firm is financed. The firm is in the 25% marginal tax bracket. 1. If the firmis fully equity-financed, what is its value? 2. Using APV, if the firm is financed with equal amounts of debt and equity today, what is its value? 3. Using WACC, if the firm is financed with equal amounts of debt and equity today, what is its value? 4. Does this firm have an optimal capital structure? If so, what is its APV and WACC?
Mantap Industries has three projects under consideration. Project L is a lower-than-averagerisk project, project A is an average-risk project, and project H is a higher-than-average-riskproject. You have gathered the following information to determine if one or more of theseprojects has an acceptable rate of return for the firm.• Sources of financing 50% debt and 50% equity• Rd = 8.00% before taxes• Tax Rate = 30%• Average beta for Mantap Industries = 1.0• Rm = 13.00%• Rf = 4.00%• Adjusted WACC = 9.30%• Beta for project L = 0.80, for project A = 1.00, and for project H = 1.20• IRRL = 9.00%, IRRA = 10.00%, and IRRH = 11.00%Calculate the required rate of return for each project and determine which, if any, projects are acceptable to the firm
The Hartley Hotel Corporation is planning a major expansion. Hartley is financed 100 percent with equity and intends to maintain this capital structure after the expansion. Hartley’s beta is 1. The expected market return is 18 percent, and the risk-free rate is 9 percent. If the expansion is expected to produce an internal rate of return of 17 percent, should Hartley make the investment? Round your answer to one decimal places. Based on the cost of capital of %, Hartley invest.