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Weighted Average Cost of Capital (WACC)

Shine and Glow: Compute cost of equity, WACC, optimal capital budget

Shine and Glow Company (S&G) uses only debt and equity. It can borrow unlimited amounts at an interest rate of 12 percent so long as it finances at its target capital structure, which calls for 45 percent debt and 55 percent common equity. Its last dividend was $2.40, its expected constant growth rate is 5 percent, and its stock

Goff Computer, Inc (GCI): Determine the cost of capital using Dell

Goff Computer, Inc (GCI): Determine the cost of capital You have recently been hired by Goff Computer, Inc (GCI), in the finance area. GCI was founded eight years ago by Chris Goff and currently operates 74 stores in the Southeast. GCI is privately owned by Chris and his family and had sales of $97 million last year. GCI

Cost of Capital

Problem 10-1 --> Payback Three separate projects each have an initial cash outlay of $10,000. The cash flow for Peter's project is $4,000 per year for three years. The cash flow for Paul's Project is $2,000 in years 1 and 3 and $8,000 in year 3. Mary's Project has a cash flow of $10,000 in year 1, followed by $1,000 each yea

Dividends/stock

The JBH Corp expects to pay a dividend next year of $2.22. It expects its cash dividends to grow 5% per year forever. JBH has a debt ratio of L = 35%. Its borrowing rate is rd =9%. JBH pays corporate taxes at the rate of 30%, rf = 6%, rm = 12%, and JBH's common stock is currently selling for $20 per share. Answer the below quesi

CGT, a Fortune 500 firm: Estimate the WACC

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

Should WACC be used to evaluate projects of varying risks?

Suppose a firm estimates its WACC to be 10 percent. Should the WACC be used to evaluate all of its potential projects, even if they vary in risk? If not, what might be "reasonable" costs of capital for average-, high-, and low-risk projects?

ADB Corporation: initial weighed average cost of capital (WACC)

ADB Corporation is considering building a new facility in Texas. To raise money for the capital projects, the corporation plans the following capital structure: 30% of money will come from issuing bonds, and 70% will come from Retained Earnings or new common stock. The corporation does not currently have preferred stock.

20 MCQ Finance: cost of equity, full capacity, project cost, R&D, value of stock

1. The Kimberly Corporation is a zero growth firm with an expected EBIT of $100,000 and a corporate tax rate of 30%. Kimberly uses $500,000 of 12.0% debt, and the cost of equity to an unlevered firm in the same risk class is 16.0%. What is the firm's cost of equity? A) 21.0% B) 23.3% C) 25.9% D) 28.8% E) 32.0% 2. Leak In

Using the WACC equation

Question 1: Company with a target structure of 60% debt and 40% common equity, with no preferred stock. The firm's cost of common equity is 12.5% and its WACC is 8.780%. If the firm's tax rate is 30% what is the before tax yield on this company's long term debt? A. 8.4% B. 9.0% C. 9.8% D. 8.2% E. 9.4% Question 2: Th

Capital Structure Concepts for Arrow Technology

Arrow Technology, Inc. (ATI) has total assets of $10,000,000 and expected operating income (EBIT) of $2,500,000. If ATI uses debt in its capital structure, the cost of this debt will be 12 percent per annum.

Goals, Ratios, Investments, Budgets, Planning, PV and WACC

MULTIPLE CHOICE. Choose the one answer for the question. 1. Which of the following is true of an efficient market? a. 0 There is one seller b. 0 There is one buyer c. 0 Stock exchanges are always open d. 0 There is always a low brokerage fee e. 0 Information is reflected in security prices immediately 2. Which of

Beckman Engineering (BEA): share price, repurchase, weighted cost of capital

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

Leverage and WACC for ABC Co. and XYZ Co.

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

Calculations for Finding the WACC

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

Project has normal cash flows

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

Capital Structure in a Perfect Market

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

WACC Components

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

Multinational Finance

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

Pendant, Inc: Weighted Average Cost of Capital

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

Capital structure, debet verus equity

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?

Weighted average cost of capital (ABC Company)

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%. Sc

JimMart: Weighted Average Cost of Capital (WACC)

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: WACC

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: WACC and Risk of Debt Financing

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

Capital Structure: 1) Graph (a) the relationships between capital costs and leverage as measured by D/V, and (b) the relationship between value and D. 2) Using the data given in part b, but now assuming that Firms L and U are both subject to a 40% corporate tax rate, repeat the analysis called for in b-(1) and b-(2) under the MM with-tax model.

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

Value-Based Management

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