Market Debt-to- Value Ratio (WD) 0.00 0.20 0.40 0.60 0.80 Market Equity-to- Value Ratio (WE) 1.00 0.80 0.60 0.40 0.20 Market Debt-to- Equity Ratio (D/E) 0.00 0.25 0.67 1.50 4.00 Before-Tax Cost of Debt (ro) 4.00% 6.00% 8.00% 10.00% 12.00% The company uses the CAPM to estimate its cost of common equity. Currently the risk-free rate is 5%, the market risk premium is 6%, and the company's tax rate is 35%. The company estimates that its beta now (which is unlevered because it currently has no debt) is 0.8. Based on this information, what is the firm's weighted average cost of capital at its optimal capital structure?

Market Debt-to- Value Ratio (WD) 0.00 0.20 0.40 0.60 0.80 Market Equity-to- Value Ratio (WE) 1.00 0.80 0.60 0.40 0.20 Market Debt-to- Equity Ratio (D/E) 0.00 0.25 0.67 1.50 4.00 Before-Tax Cost of Debt (ro) 4.00% 6.00% 8.00% 10.00% 12.00% The company uses the CAPM to estimate its cost of common equity. Currently the risk-free rate is 5%, the market risk premium is 6%, and the company's tax rate is 35%. The company estimates that its beta now (which is unlevered because it currently has no debt) is 0.8. Based on this information, what is the firm's weighted average cost of capital at its optimal capital structure?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter16: Capital Structure Decisions

Section: Chapter Questions

Problem 11P: WACC and Optimal Capital Structure F. Pierce Products Inc. is considering changing its capital...

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WACC and Optimal Capital Structure F. Pierce Products Inc. is considering changing its capital structure. F. Pierce currently has no debt and no preferred stock, but it would like to add some debt to take advantage of low interest rates and the tax shield. Its investment banker has indicated that the pre-tax cost of debt under various possible capital structures would be as follows: F. Pierce uses the CAPM to estimate its cost of common equity, rs and at the time of the analysis the risk-free rate is 5%, the market risk premium is 6%, and the companys tax rate is 40%. F. Pierce estimates that its beta now (which is unlevered because it currently has no debt) is 0.8. Based on this information, what is the firms optimal capital structure, and what would be the weighted average cost of capital at the optimal capital structure?
B.F. Pierce & Company is considering changing its capital structure. The company currently has no debt and no preferred stock, but it would like to add some debt to take advantage of low interest rates and the tax shield. Its investment banker has indicated that the pre-tax cost of debt under various possible capital structures would be as follows: 8.66% 9.21% 8.83% Market Debt-to- Value Ratio 9.07% (WD) 0.00 0.20 0.40 0.60 0.80 Market Equity-to- Value Ratio (WE) 1.00 0.80 0.60 0.40 0.20 Market Debt-to- Equity Ratio (D/E) 0.00 0.25 0.67 1.50 4.00 Before-Tax Cost of Debt (rD) 5.00% The company uses the CAPM to estimate its cost of common equity. Currently the risk-free rate is 4%, the market risk premium is 6%, and the company's tax rate is 25%. The company estimates that its beta now (which is unlevered because it currently has no debt) is 0.8. Based on this information, what is the firm's weighted average cost of capital at its optimal capital structure? 6.00% 7.00% 8.00% 9.00%
WACC and Optimal Capital Structure F. Pierce Products Inc. is considering changing its capital structure. F. Pierce currently has no debt and no preferred stock, but it would like to add some debt to take advantage of the tax shield. Its investment banker has indicated that the pre-tax cost of debt under various possible capital structures would be as follows: Equity: Market Debt-to- Value Ratio (wa) 0.0 0.10 0.20 0.30 0.40 F. Pierce uses the CAPM to estimate its cost of common equity, rs, and at the time of the analaysis the risk-free rate is 5%, the market risk premium is 7%, and the company's tax rate is 25%. F. Pierce estimates that its beta now (which is "unlevered" because it currently has no debt) is 0.7. Based on this information, what is the firm's optimal capital structure, and what would be the weighted average cost of capital at the optimal capital structure? Do not round intermediate calculations. Round your answers to two decimal places. Debt: WACC: Market Equity-to-…
WACC and Optimal Capital Structure F. Pierce Products Inc. is considering changing its capital structure. F. Pierce currently has no debt and no preferred stock, but it would like to add some debt to take advantage of the tax shield. Its investment banker has indicated that the pre-tax cost of debt under various possible capital structures would be as follows: Market Debt-to-Value Ratio (wd) Market Equity-to-Value Ratio (ws) Market Debt-toEquity Ratio (D/S) Before-Tax Cost ofDebt (rd) 0.0 1.0 0.00 6.0 % 0.10 0.90 0.1111 6.4 0.20 0.80 0.2500 7.0 0.30 0.70 0.4286 8.2 0.40 0.60 0.6667 10.0 F. Pierce uses the CAPM to estimate its cost of common equity, rs, and at the time of the analaysis the risk-free rate is 5%, the market risk premium is 7%, and the company's tax rate is 25%. F. Pierce estimates that its beta now (which is "unlevered" because it currently has no debt) is 0.9. Based on this information, what is the firm's optimal…
Patented Products is considering changing its capital structure. Patented currently has no debt and no preferred stock, but it would like to add some debt to take advantage of the tax shield. Its investment banker has indicated that the pre-tax cost of debt under various possible capital structures would be as follows: Debt ratio (wd) Equity ratio (we) Debt/Equity ratio B-T cost of debt 0.0 1.0 0.0 6.0% 0.10 0.90 0.1111 6.4 0.20 0.80 0.2500 7.0 0.30 0.70 0.4286 8.2 0.40 0.60 0.6667 10.0 Patented uses the CAPM to estimate its cost of common equity, rs, and at the…
F. Pierce Products Inc. is considering changing its capital structure. F. Pierce currentlyhas no debt and no preferred stock, but it would like to add some debt to takeadvantage of low interest rates and the tax shield. Its investment banker has indicatedthat the pre-tax cost of debt under various possible capital structures would be asfollows:Market Debt-to-Value Ratio (wd) 0.0 0.2 0.4 0.6 0.8 Market Equity-to-Value Ratio (ws) 1.0 0.8 0.6 0.4 0.2 Market Debt-to-Equity Ratio (D/S) 0.00 0.25 0.67 1.50 4.00 Before-Tax Costof Debt (rd) 6.0% 7.0 8.0 9.0 10.0 F. Pierce uses the CAPM to estimate its cost of common equity, rs and at the time of theanalysis the risk-free rate is 5%, the market risk premium is 6%, and the company’s taxrate is 40%. F. Pierce estimates that its beta now (which is “unlevered” because itcurrently has no debt) is 0.8. Based on this information, what is the firm’s optimalcapital structure, and what would be the weighted average cost of capital at the optimalcapital…
F. Pierce Products Inc. is considering changing its capital structure. F. Pierce currently has no debt and no preferred stock, but it would like to add some debt to take advantage of the tax shield. Its investment banker has indicated that the pre-tax cost of debt under various possible capital structures would be as follows: Market Debt-to Equity Ratio (D/S) 0.00 0.1111 0.2500 0.4286 0.6667 Market Equity-to- Value Ratio (ws) 1.0 0.90 6.0% 6.4 0.80 7.0 8.2 0.70 0.60 10.0 F. Pierce uses the CAPM to estimate its cost of common equity, rs, and at the time of the analaysis the risk-free rate is 6%, the market risk premium is 8%, and the company's tax rate is 25%. F. Pierce estimates that its beta now (which is "unlevered" because it currently has no debt) is 0.7. Based on this information, what is the firm's optimal capital structure, and what would be the weighted average cost of capital at the optimal capital structure? Do not round intermediate calculations. Round your answers to two…
Pierce Products Inc. is considering changing its capital structure. F. Pierce currently has no debt and no preferred stock, but it would like to add some debt to take advantage of low interest rates and the tax shield. Its investment banker has indicated that the pre-tax cost of debt under various possible capital structures would be as follows: Market Debt-to-ValueRatio(wd) Market Equity-to-ValueRatio(ws) Market Debt-to-EquityRatio(D/S) Before-Tax Cost of Debt (rd) 0.0 1.0 0.00 6.0% 0.2 0.8 0.25 7.0 0.4 0.6 0.67* 8.0 0.6 0.4 1.50 9.0 0.8 0.2 4.00 10.0 * Use the exact value of 2/3 in your calculations. F. Pierce uses the CAPM to estimate its cost of common equity, rs and at the time of the analaysis the risk-free rate is 6%, the market risk premium is 5%, and the company's tax rate is 40%. F. Pierce estimates that its beta now (which is "unlevered" because it currently has no debt) is 1.25. Based on this information, what is the firm's optimal capital…
If company’s debt-to-equity ratio is 0.25, what is the weighted average cost of capital for the company if the required rate of return is 12. 1% and the cost of debt is 6.5%? Assume no tax rate A 7.90% B 7.62% C 10.98% D 10.70% E 9.30% Company is considering investing in a project. After consulting with their analysts, they find that the payback period for the project is 2 years and 6 months. If cash inflows are $4, 000. then the initial investment is. Answer rounded to the nearest whole dollar
OOOO As a financial analyst for a firm looking to make an investment in its operations, you are tasked with determining how upcoming projects are financed. Because the board of directors decided years ago that it would not offer preferred stock, the firm is comprised of only debt and equity financing. Given the following analysis of optional capital Ostructures, which is the optimal capital structure? Proportion of Debt After-Tax Cost Cost of Weighted Financing of Debt Equity Cost 0% 5% 9% 9.00% 10% 5% 9% 8.60% 20% 5% 9% 8.20% 30% 5% 9% 7.80% 40% 5% 10% 8.00% 50% 6% 11% 8.50% 60% 7% 13% 9.40% 70% 10% 17% 12.10% 80% 12% 20% 13.60% 90% 15% 25% 16.00% 100% 18% 25% 18.00% • . O · O 0 a. 30 percent b. 40 percent O c. 100 percent O d. 0 percent Icon Kov
WACC AND OPTIMAL CAPITAL STRUCTURE Elliott Athletics is trying to determine its optimal capital structure, which now consists of only debt and common equity. The firm does not currently use preferred stock in its capital structure, and it does not plan to do so in the future. Its treasury staff has consulted with investment bankers. On the basis of those discussions, the staff has created the following table showing the firms debt cost at different debt levels: Elliott uses the CAPM to estimate its cost of common equity. rs and estimates that the risk free rate is 5%, the market risk premium is 6%, and its tax rate is 25%. Elliott estimates that if it had no debt, its unleveled beta, bU, would be 1.2. a. What is the firms optimal capital structure, and what would be its WACC at the optimal capital structure? b. If Elliotts managers anticipate that the companys business risk will increase in the future, what effect would this likely have on the firms target capital structure? c. If Congress were to dramatically increase the corporate tax rate, what effect would this likely have on Elliotts target capital structure? d. Plot a graph of the after-tax cost of debt, the cost of equity, and the WACC versus (1) the debt/capital ratio and (2) the debt/equity ratio.
Ilumina Corp is trying to determine its optimal capital structure. The company’s capital structure consists of debt and common stock. In order to estimate the cost of debt, the company has produced the following table: Percent financed with debt (wd) Percent financed with equity (wc) Debt-to-equity ratio (D/S) After-tax cost of debt (%) 0.25 0.75 0.25/0.75 = 0.33 6.9% 0.35 0.65 0.35/0.65 = 0.5385 7.1% 0.50 0.50 0.50/0.50 = 1.00 8.0% The company uses the CAPM to estimate its cost of common equity, rs. The risk-free rate is 5% and the market risk premium is 6%. Ilumina estimates that its beta with 10% debt is 1. The company’s tax rate, T, is 40%. On the basis of this information, what is the company’s optimal capital structure, and what is the firm’s cost of capital at this optimal capital structure? (Please show work)