1. Which of the following statements is CORRECT? a. An investor can eliminate virtually all market risk if he or she holds a very large and well diversified portfolio of stocks. b. The higher the correlation between the stocks in a portfolio, the lower the risk inherent in the portfolio. c. It is impossible to have
Beckman Engineering and Associates (BEA) has 25 million shares outstanding. Shares are trading at $8.00. BEA management plans to raise $60 million to by issuing debt to repurchase shares. Suppose that BEA is an all equity firm before the debt issue, it is subject to 36% corporate tax rate, its cost of debt is 5% and equity co
Please see attached. Please work out in steps. H Corp is a growing company. Analysts project the following free cash flow during the next 2 years, after which FCFs are expected to grow at a constant 5% rate. H Corp cost of capital is WACC = 10 %. Time 1 2 3 FCF 50 75 a. What is the terminal or horizon value at year 2? b. W
Zinger Corporation manufactures industrial type sewing machines. Zinger Corp. received a very large order from a few European countries. In order to be able to supply these countries with its products, Zinger will have to expand its facilities. Of the required expansion, Zinger feels it can raise $75 million internally, through
You are employed by CGT, a Fortune 500 firm that is a major producer of chemicals and plastics, including plastic grocery bags, styrofoam cups, and fertilizers. You are on the corporate staff as an assistant to the CFO. This is a position with high visibility and the opportunity for rapid advancement, providing you make the ri
A company has an expected EBIT of $45,000 in perpetuity and a tax rate of 35%. The firm has $80,000 in outstanding debt at an interest rate of 9% with an unleveled cost of capital of 14%. What is the value of the firm according to M&M proposition 1 with taxes? Should they change their debt-equity ration if the goal is to maxi
A company expects its EBIT to be $85,000 every year forever. The firm can borrow at 11%. They currently have no debt and their cost of equity is 18%. If the tax rate is 35% what is the value of the firm? What will the value be if they borrow $60,000 and use the proceeds to repurchase shares? What is the cost of equity after reca
ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all equity financed with $800,000 in stock. XYZ uses both stock and perpetual debt. Its stock is worth $400,000 and the interest rate on its debt is 10%. Both firms expect EBIT to be $90,000. Ignore Taxes. Rico owns $30,000 wort
Find the WACC for a company with a tax rate of 35% Debt: 5,000 7% coupon bonds outstanding, $1,000 par value, 20 years to maturity, selling for 92% of par, the bonds make semiannual payments. Common Stock: 100,000 shares outstanding, selling for $57 per share, the beta is 1.15 Preferred Stock: 13,000 shares of 7% prefer
Define WACC and what factors influences a company's WACC? Should composite WACC be used as a hurdle rate for a company's separate divisions?
10) Thompson stores is considering a project that has the following cash flow data. What is the projects IRR. Note that the projects projected IRR can be less than WACC (and even negative), in which case it will be rejected. YEAR CASH FLOW 0 (1000) 1
Assume a project has normal cash flows. All else equal, which of the following statements is correct? -The projects IRR increases as the WACC declines - The projects NPV increases as the WACC declines - The projects MIRR is unaffected by changes in WACC -The projects regular payback increases as the WACC declines
Mike's Motors has 30 million shares outstanding with a price of $15 per share. In addition, Mike has issued bonds with a total current market value of $150 million. Suppose Rumolt's equity cost of capital is 10%, and its debt cost of capital is 5%. a. What is Mike's pretax weighted average cost of capital? Pretax weighted a
X Co. had the following stock transactions during the fiscal year ended June 30, 20X4: Beginning stick balance, July1, 20X3 100,000 shares 2:1 stock split, September 30, 20X3 Issuance of additional shares, January 1, 20X4 50,000 shares Repurchase of shares, June 23, 20X4 1,040 shares
Part A. Cost of Debt - Micro Spinoffs Inc., issued 20 year debt a year ago at coupon rate at 8 percent annually. Today the debt is selly at $1050. If the firms tax bracket is 35%, what is the afer-tax cost of the debt? Part B. Cost of Preferred Stock - Micro Spinoffs also has preferred stock that is outstanding. The st
A) Suppose a company has bonds of $600,000, preferred stock of $100,000 and common stock of $300,000. The after tax cost of tax is 6%, preferred stock is 8%, and common stock is 12%. What is the WACC? B) Suppose a company has bonds of $600,000, preferred stock of $100,000 and common stock of $300,000. The before tax cost o
Can anyone assist with this review questions. Just trying to double check my stuff. Thanks! 1. LipTea Incorporated purchases raw materials and has processing plants around the world. The standard deviation of the firmâ s equity returns is 1.2 times as great as the marketâ s standard deviation of returns. If the correlati
1. Weekend Warriors, Inc., has 35% debt and 65% equity in its capital structure. The firms estimated after-tax cost of debt is 8% and its estimated cost of equity is 13%. Determine the firm's weighted average cost of capital (WACC)?
The treasurer at Pendant, Inc. is estimating the company's weighted average cost of capital. Everyone in the company evaluating capital investments will use this estimate of WACC. The financial information is as follows: The company's 6.5% coupon rate bonds pay annual interest, mature eight years from now and sell on the New
Should a company have more debt or more equity in its capital structure? Explain your answer. What are some limitations of utilizing debt versus equity in the capital structure?
Please show calculations. The CFO has asked you to recompute the ABC's weighted average cost of capital based upon three different financing scenarios. Tax rate of 40%. Current financial structure is $4,500,000 debt at an average interest rate of 8.5% and common equity of $2,500,000 with a required return of 16%. Scena
A stock analyst has obtained the following information about JimMart, a large retail chain. (1) The company has non-callable bonds with 20 years maturity remaining and a maturity value of $1000. The bonds have a 12 percent annual coupon and currently sell at a price of $1273.8564. (2) Over the past four years, the returns
Whole Foods Market is company with over $1 billion in annual sales. The firm, which operates under the ticker symbol WFMI uses bonds, preferred stock, and common stock for funding. - Whole Foods bonds each sell for $935, pay coupons of $20 every six months, and have 8 years remaining to maturity. The par value of the bonds
Brown Inc. has a capital structure consisting of $5,000,000 in long-term debt and $15,000,000 in common equity. The interest rate paid on the long-term debt is 7.5%. Brown Inc. is in the 35% tax bracket. On the common equity (stock) the firm pays an annual dividend of $1.10 and it expects to grow the dividend by 15 % per year fo
A firm's current balance sheet is as follows: Assets $100 Debt $10 Equity $90 A) What is the firm's weighted-average cost of capital at various combinations of debt and equity, given the following information? Debt/Assets After-Tax Cost of Debt Cost of Equity Cost of Capital 0% 8% 12% ? 10 8 12 ? 20 8 12 ? 30 8
I am providing all the information that I have completed so far, along with the problem from the TextBook. I need help setting up the formula for WACC. Attached is the file to use. Chapter 11 Case : Evaluating McGraw Industries' Capital Structure McGraw Industries, an established producer of printing equipment, expects its s
The CEO of a company is worried about his company's level of debt financing. The company uses short-term debt to finance its temporary working capital needs, but it does not use any permanent (long-term) debt. Other companies in the same industry average about 30% debt, while the CEO wonders why they use so much more debt and ho
What is the WACC of the following capital structure? 30% debt 20% preferred 50% common equity after tax debt 8% and the cost of preferred is 6.5% and the total retained earnings is 13.25 The firm will not issue new stock.
I have created a spreadsheet and attached for the following problem. The questions needing an answer are a through e and are in blue. The Henley Corporation is a privately held company specializing in lawn care products and services. The most recent financial statements are attached.
KFS has two divisions. Both have current sales of $1,000, current expected growth of 5%, and a WACC of 10%. Division A has high profitability (OP = 6%) but high capital requirements (CR = 78%). Division B has low profitability (OP = 4%) but low capital requirements (CR = 27%). 1. What is the MVA of each division, based on th