Part 2 (Continuation) Sayote Corporation is considering changing its capital structure in order to lower its cost of capital and raise firm value. Sayote currently has a capital structure that is 20 percent debt and 80 percent equity based on market values. (It has a D/E ratio of 0.25.) The risk-free rate is 7%, and the business risk premium is 5%. The company's current cost of equity, calculated using the CAPM, is 14%, and its tax rate is 35%. What will Sayote's estimated cost of equity be if it changed its capital structure to 50% debt and 50% equity? Compute for the new levered beta using the new capital structure.(Hint: Find the firm's new cost of equity given the new levered beta) *

Part 2 (Continuation) Sayote Corporation is considering changing its capital structure in order to lower its cost of capital and raise firm value. Sayote currently has a capital structure that is 20 percent debt and 80 percent equity based on market values. (It has a D/E ratio of 0.25.) The risk-free rate is 7%, and the business risk premium is 5%. The company's current cost of equity, calculated using the CAPM, is 14%, and its tax rate is 35%. What will Sayote's estimated cost of equity be if it changed its capital structure to 50% debt and 50% equity? Compute for the new levered beta using the new capital structure.(Hint: Find the firm's new cost of equity given the new levered beta) *

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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Part 1-Sayote Corporation is considering changing its capital structure in order to lower its cost of capital and raise firm value. Sayote currently has a capital structure that is 20 percent debt and 80 percent equity based on market values. (It has a D/E ratio of 0.25.) The risk-free rate is 7%, and the business risk premium is 5%. The company's current cost of equity, calculated using the CAPM, is 14%, and its tax rate is 35%. What will Sayote's estimated cost of equity be if it changed its capital structure to 50% debt and 50% equity? Compute for the new levered beta using the new capital structure. * Your answer
Please show all work on excel Cartwright Communications is considering making a change to its capital structure to reduce its cost of capital and increase firm value. Right now, Cartwright has a capital structure that consists of 20% debt and 80% equity, based on market values. (Its D/E ratio is 0.25.) The risk-free rate is 6% and the market risk premium, rM – rRF, is 5%. Currently the company's cost of equity, which is based on the CAPM, is 12% and its tax rate is 40%. A. What would be Cartwright's estimated cost of equity if it were to change its capital structure to 50% debt and 50% equity?
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
The cost of raising capital through retained eamings is the cost of raising capital through issuing new common stock. The cost of equity using the CAPM approach The current risk-free rate of return (rRF) is 4.23 % , while the market risk premium is 6.63 %. the D'Amico Company has a beta of 0.78. Using the Capital Asset Pricing Model (CAPM) approach, D'Amico's cost of equity is The cost of equity using the bond yield plus risk premium approach The Hoover Company is closely held and, therefore, cannot generate reliable inputs with which to use the CAPM method for estimating a company's cost of internal equity. Hoover's bonds yield 11.52%, and the fim's analysts estimate that the firm's risk premium on its stock over its bonds is 3.55 %. Based on the bond-yield-plus-risk-premium approach, Hoover's cost of internal equity is: 18.08% 14.32% 15.07% 18.84% The cost of equity using the discounted cashflow (or dividend growth) approach Kirby Enterprises's stock is currently selling for $32.45…
1) A firm that is currently unlevered has WACC = rS = 10%/year. This company plans to do a recapitalization by issuing debt and repurchasing equity. After the recapitalization, the debt-to-equity (D/E) ratio will be 0.5. If the cost of debt, rD, is 6%, what will be rS after the recapitalization? 2) A firm with wD = 0.35 and wS = 0.65 plans to issue another $100 million of permanent debt. The firm's tax rate is 21%. The bonds will be issued at par with coupon rate = rD = 7%/year. The firm's WACC is 11%/year. By how much will the new debt change the value of the firm, and who will receive this value? A) Firm value will increase by $21 million, and all $21 million will go to the shareholders B) Firm value will increase by $9 million, and 35% will go to the bondholders, 65% to the shareholders C) Firm value will increase by $18.6 million, and 35% will go to the bondholders, 65% to the stockholders D) Firm value will increase by $21 million, and all $21 million will go to the…
Case 2: Cost of capital. a. Bellevue is a hotel company. It currently has a total enterprise value of 500, debt outstanding for 200, an which it pays cost of debt equal to 5%. You have also estimated that its beta of equity is 0.8, and the company faces a corporate tax of 25%. The risk-free rate you observe in the market is 3%, and you estimate the equity risk premium to be 6% What is Bellevue Warc? b. Suppose that Bellevue ints to expand its activity by taking over a restaurant company. You find three compa in the restaurant industry (Eatout, Goodfood and Dinein) that are listed in a stock exchange, so that you can gather relevant financial information. Bellevue is planning to fund the acquisition with the same capital structure of its main hotel business (ie =40%). Assuming that the corporate tax is 25%, the risk free rate is 3% and the equity risk premium is 6%, calculate the WACC that Bellevue should use for analyzing its planned investment in the restaurant industry.…
Case 2: Cost of capital. a. Bellevue is a hotel company. It currently has a total enterprise value of 500, debt outstanding for 200, on which it pays cost of debt equal to 5%. You have also estimated that its beta of equity is 0.8, and the company faces a corporate tax of 25%. The risk-free rate you observe in the market is 3%, and you estimate the equity risk premium to be 6%. What is Bellevue Wacc? b. Suppose that Bellevue wants to expand its activity by taking over a restaurant company. You find three companies in the restaurant industry (Eatout, Goodfood and Dinein) that are listed in a stock exchange, so that you can gather relevant financial information. Bellevue is planning to fund the acquisition with the same capital structure of its main hotel business (i.e.: D/EV=40%). Assuming that the corporate tax is 25%, the risk free rate is 3% and the equity risk premium is 6%, calculate the WACC that Bellevue should use for analyzing its planned investment in the restaurant industry.…
A firm that is currently unlevered has WACC = rS = 10%/year. This company plans to do a recapitalization by issuing debt and repurchasing equity. After the recapitalization, the debt-to-equity (D/E) ratio will be 0.5. If the cost of debt, rD, is 6%, what will be rS after the recapitalization?
A firm has decided that its optimal capital structure is 100% equity-financed. It perceives its optimal dividend policy to be a 60% payout ratio. Asset turnover is sales/assets = 0.6, the profit margin is 10%, and the firm has a target growth rate of 3%. a-1. Calculate the sustainable growth rate. (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.) a-2. Is the firm’s target growth rate consistent with its other goals? b. If the firm’s target growth rate is not consistent with its other goals, what would asset turnover need to be to achieve its goals? (Do not round intermediate calculations. Round your answer to 3 decimal places.) c. If the firm’s target growth rate is not consistent with its other goals, how high would the profit margin need to be to achieve its goals? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.)
To help them estimate the company's cost of capital, Smithco has hired you as a consultant. You have been provided with the following data: D1 = $1.45; P0 = $22.50; and gL = 6.50% (constant). Based on the dividend growth approach, what is the cost of common from reinvested earnings? Group of answer choices 12.94% 11.68% 12.30% 13.59% 11.10%
1.a. Austin Metal Company reported Current Assets of $209,000 and Current Liabilities of $110,000. Calculate working capital and explain the results 1.b. The Company DEN has a beta of 1.30. The risk-free rate of return is 1.90 percent and the market rate of return is 5.10 percent. What is the CAPM cost of equity? kindly explain in detail
Suppose that AXA currently has no debt and has an equity cost of capital of 12%. AXA is considering borrowing funds at a cost of 6% and using these funds to repurchase existing shares of stock. Assume perfect capital markets. If AXA borrows until it achieved a debt‐to‐equity ratio of 1/2, then AXAʹs levered cost of equity would be closest to: A. 18.0% B. 6.0% C. 15.0% D. 10.0%