Virtual Excursions, Pty is financed 80% by common stock and 20% by bonds. The expected return on the common stock is 12%, and the rate of interest on the bond is 6%. The bonds are default-free and that there are no taxes. Assume that the company issues more debt and uses the proceeds to retire equity. The new financing mix is 60% equity and 40% debt. If the debt is default-free. a) What will be the expected rate of return on equity? b) What will be the expected return on the package of common stocks and bonds?

Virtual Excursions, Pty is financed 80% by common stock and 20% by bonds. The expected return on the common stock is 12%, and the rate of interest on the bond is 6%. The bonds are default-free and that there are no taxes. Assume that the company issues more debt and uses the proceeds to retire equity. The new financing mix is 60% equity and 40% debt. If the debt is default-free. a) What will be the expected rate of return on equity? b) What will be the expected return on the package of common stocks and bonds?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter11: Determining The Cost Of Capital

Section: Chapter Questions

Problem 16P

See similar textbooks

Similar questions

Cost of debt with fees. Kenny Enterprises will issue a bond with a par value of $1,000, a maturity of twenty years, and a coupon rate of 11.2% with semiannual payments, and will use an investment bank that charges $30 per bond for its services. What is the cost of debt for Kenny Enterprises at the following market prices? a. $979.18 b. $1,009.76 c. $1,111.03 d. $1,147.97 a. What is the cost of debt for Kenny Enterprises at a market price of $979.18? ☐ % (Round to two decimal places.)
Cost of debt with fees. Kenny Enterprises will issue a bond with a par value of $1,000, a maturity of twenty years, and a coupon rate of 8.8% with semiannual payments, and will use an investment bank that charges $30 per bond for its services. What is the cost of debt for Kenny Enterprises at the following market prices? a. $940.59 b. $1,004.38 c. $1,103.95 d. $1,162.45
Cost of debt with fees. Kenny Enterprises will issue a bond with a par value of $1,000, a maturity of twenty years, and a coupon rate of 10.8% with semiannual payments, and will use an investment bank that charges $30 per bond for its services. What is the cost of debt for Kenny Enterprises at the following market prices? a. $931.44 b. $1,013.16 c. $1,102.27 d. $1,152.27 ..... a. What is the cost of debt for Kenny Enterprises at a market price of $931.44? |% (Round to two decimal places.)
Cost of debt with fees. Kenny Enterprises will issue a bond with a par value of$1,000, a maturity of twenty years, and a coupon rate of8.0%with semiannual payments, and will use an investment bank that charges$25per bond for its services. What is the cost of debt for Kenny Enterprises at the following market prices? a.$920b.$1,000c.$1,080d.$1,173
Doha plc has some surplus funds that it wishes to invest in bonds. The company requires a return of 15% on bonds, and the finance director has asked you to analyse whether it should invest in either of the following bonds that are available:Company A: Expected profit 12% bonds, redeemable at par at the end of two more years, with a current market value of QAR 95 per QAR 100 bondCompany B: Expected profit 8% bonds, redeemable at QAR110 at the end of two more years, with a current market value of QAR 95 per QAR 100 bonda. Calculate the expected value (price) of the two bonds and evaluate if either offer an appropriate return for Doha Plc.b. Critically evaluate what would be the impact on the price of bonds if Doha Plc reduces their required return.c. Critically evaluate and discuss the factors that should be considered by the directors of a company when choosing whether to use debt or equity finance for a new projectd. Recently one director has attended a finance conference, on their…
DIRECTIONS: Read and analyze the following problems and supply what is required and support it with necessary computations. 1. A company plans to issue a 25-year bond with a 12.5% interest rate, issued at a face value of P1, 000. The company is subject a 30% tax rate and expects a return on investment at 8%. Compute for the cost of debt issuance.
Schmidt and Sons Co. has an optimal debt-equity ratio of 1.5. To issue new equity, the company must pay a flotation cost of 5%. To issue new bonds, the flotation cost is 3%. What is the weighted average flotation for the company? Multiple Choice O O O 4.8% 3.2% 3.8% 2.8% 4.2%
QA) Tanten Company has 200% debt and 80% equity. The borrowing rate is 12%. (1) If you own 4% of the stock of Abacus, what is your dollar return if the company has net operating income of $750,000 and the over all capitalization rate , Ko, is 15%? Value of the firm is 500,000 (2) What is the implied required rate of return on equity?
You plan to purchase debenture bonds from one of two companies in the same industry that are similar in size and performance. The first company has $800,000 in total liabilities, and $1,200,000 in equity. the second company has $600,000 in total liabilities, and $400,000 in equity. 2. Which company's debenture bonds are less risky based on the debt-to-equity ratio? Explain. Show your calculations to support your decision.
1. Alpha Co. is planning to issue bonds semiannuallywith a coupon rate of 8%, issued and 30 years to maturity. Assume the nominal interest rate on bonds is 7%. The par value of $1,000. What is the value of the coupon for the bondholder will receive? 2. A lessee and lessor face the same tax rate interest rate. Also, there are no transaction costs. The net advantage to leasing for the lessor is $450. Under these conditions, what is the net advantage to leasing be for the lessee under this proposed lease payment? (I answered $450 but it was wrong)
Dunder-Mifflin, Inc. hires an investment banker for the sale of the 600,000 bonds from Problem 4. The investment banker charges a 2% fee on each bond sold. What is the cost of debt to DMI if the following are the proceeds before the banker's fees are deducted? (Use information from the previous problem) $45,000,000? 16.38% 16.86% 15.06% 17.17% 14.12%
A firm had a debt ratio of 1.20. The pretax cost of debt is 8% and the reqiured return on asset is 13%. What is the cost of equity if you Ignore taxes? A) 18.24% B) 20.14% C)17.67% D) 19.57% E) 19%