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Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
What is the debt ratio at the optimal capital structure of XYZ Inc.?
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- Alpha Corporation has average annual free cashflows to the equity holder and to the firmof P3,000,000 and P3,350,000 respectively. Assuming that the weighted average cost ofcapital and actual return of on assets is 16.75% while the market return on Alpha's debt is7%, what is the value of its equity? a. P34,358,974.36 b.P15,000,000.00 c.P17,910,447.76 d.P20,000,000.00Biotec has estimated the costs of debt and equity capital for various proportions of debt in its capital structure: % of Debt Cost of Debt (%) Cost of Equity (%) 35 5.4 13.8 40 5.6 14.0 45 5.9 14.3 50 6.4 14.7 If Biotec pays a current dividend of $1.00 and expects dividends to grow at a constant rate of 7%, what is Biotec's stock price if it obtains its optimal capital structure?Zippy Pasta Corporation (ZPC) has a constant growth rate of 7 percent. The company retains 30 percent of its earnings to fund future growth. ZPC’s expected EPS (EPS1) and ks for various capital structures are given below. Debt/Total Assets (%) Expected EPS (RM) ks (%) 20% $2.50 15.0% 30 3.00 15.5 40 3.25 16.0 50 3.75 17.0 70 4.00 18.0 Required: What is the optimal capital structure for ZPC? Show all of your working and explain your answer.…
- Zippy Pasta Corporation (ZPC) has a constant growth rate of 7 percent. The company retains 30 percent of its earnings to fund future growth. ZPC’s expected EPS (EPS1) and ks for various capital structures are given below. Debt/Total Assets (%) Expected EPS (RM) ks (%) 20% $2.50 15.0% 30 3.00 15.5 40 3.25 16.0 50 3.75 17.0 70 4.00 18.0 What is the optimal capital structure for ZPC? Show all of your working and explain your answer. (Hints: Capital structure is…If the company's dividends growth rate is 2%, what would be the optimal capital structure for ABC Co.? ABC Co. has the following projected results for next year's operation depending on the chosen capital structure. Debt Dividends Cost of Ratio Per Share Equity 0% P5.50 11.5 % 25% 6.00 12.0 % 40% 6.50 13.0 % 50% 7.00 14.0 % 75% 7.50 15.0 % A. 0% debt; 100% equity B. 25% debt; 75% equity C. 40% debt; 60% equity D. 50% debt; 50% equity E. 75% debt; 25% equitySwitch Engines Inc. has a capital structure of 40% debt and 60% common equity. The current market price of the Switch Engines Inc.’s share is P28, last dividend declared was P2.2. The expected dividend growth rate is 6%. What is Switch Engines Inc cost of retained earning a. 14.8% b. 12.9% c. 11.9% d. 14.3%
- Reingaart Systems is expected to pay a $3.4 dividend at year end (D1 = $3.4), the dividend is expected to grow at a constant rate of 5.8% a year, and the common stock currently sells for $65 a share. The before-tax cost of debt is 7.8%, and the tax rate is 29%. The target capital structure consists of 56% debt and 44% common equity. What is the company's WACC if all equity is from retained earnings? O 8.55% O 7.65% O 7.95% O 7.35% 8.25%Draiman Company has a debt-equity ratio of 0.75. Return on assets is 10.4 percent, and total equity is $900,000. What is the equity multiplier? Return on equity? Netincome?Assume Meyer Corporation is 100 percent equity financed. Calculate the return on equity, given thefollowing information:Earnings before taxes 1,500Sales 5,000Dividend payout ratio 60%Total assets turnover 2Tax rate 30%
- You have the following information on a company on which to base your calculations and discussion: Cost of equity capital (rE) = 18.55% Cost of debt (rD) = 7.85% Expected market premium (rM –rF) = 8.35% Risk-free rate (rF) = 5.95% Inflation = 0% Corporate tax rate (TC) = 35% Current long-term and target debt-equity ratio (D:E) = 2:5 a. What are the equity beta (bE) and debt beta (bD) of the firm described above?[Hint: Assume that the above costs of capital have been generated by an appropriate equilibrium model.] b. What is the weighted-average cost of capital (WACC) for this firm at the current debt-equity ratio? c. What would the company’s cost of equity capital become if you unlevered the capital structure (i.e. reduced gearing until there is no debt)Evans Technology has the following capital structure. Debt Common equity 30% 70 The aftertax cost of debt is 7.50 percent, and the cost of common equity (in the form of retained earnings) is 14.50 percent. a. What is the firm's weighted average cost of capital? Note: Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places. Debt Common equity Weighted average cost of capital Weighted Cost % 0.00 % Q Search An outside consultant has suggested that because debt is cheaper than equity, the firm should switch to a capital structure that is 50 percent debt and 50 percent equity. Under this new and more debt-oriented arrangement, the aftertax cost of debt is 8.50 percent, and the cost of common equity (in the form of retained earnings) is 16.50 percent. b. Recalculate the firm's weighted average cost of capital. O CheHook 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?