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Weighted Average Cost of Capital (WACC)

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

Calculate capital and capital structure, cost of equity and WACC

Please see and use the attached spreadsheet! Thank you! Harriston Electronics builds circuit boards for a variety of applications in industrial equipment. The firm was founded in 1983 by two electrical engineers who left their jobs with the General Electric (GE) Corporation. Its balance sheet for year-end 2006 describes a fir

Cost of equity capital and WACC

Amgel Manufacturing Company's current capital structure is comprised of 30% debt and 70% equity (based on market values). Amgel's equity beta (based on its current level of debt financing) is 1.20, and its debt beta is 0.29. Also, the risk-free rate of interest is currently 4.5% on long-term government bonds. Amgel's investment

Calculating Cost of Equity

Smaltz Enterprises is currently involved in its annual review of the firm's cost of capital. Historically, the firm has relied on the CAPM to estimate its cost of equity capital. The firm estimates that its equity beta is 1.25, and the current yield on long-term U.S. Treasury bonds is 4.28%. The firm's CFO is currently in a d

Compute Weighted Average Cost of Capital (WACC) for Firm X

If Firm X has a 28% cost of equity and a 10% before tax cost of debt capital. The firm's debt to equity ratio is 2. Firm X is interested in investing in a telecom project. The corporate tax rate is 35%. What is the weighted average cost of capital for Firm X? Please include formulas and work process so I can understand wher

Undertake the LBO for home security systems

Cheek Products was founded 53 years ago by Joe Cheek and originally sold snack foods such as potato chips and pretzels. Through acquisitions, the company has grown into a conglomerate with major divisions in the snack food industry, home security systems, cosmetics, and plastics. Additionally, the company has several smaller div

Suppose Sora's revenue and free cash flow are expected to grow at a 5% rate beyond year 4. If Sora's weighted average cost of capital is 10%, what is the value of Sora's stock based on this information?

Sora Industries has 60 milliion outstanding shares, $120 million in debt, $40 million in cash, and the following projected free cash flow for the next four years: (See attached file for details) Suppose Sora's revenue and free cash flow are expected to grow at a 5% rate beyond year 4. If Sora's weighted average

Divisional WACC: Anheuser-Busch Companies, Inc

Divisional WACC In 2006 Anheuser-Busch Companies, Inc (BUD) engaged in the production and distribution of beer worldwide, operating through four business segments: Domestic Beer, International Beer, Packaging, and Entertainment. The Domestic Beer segment offers beer under Budweiser, Michelob, Busch, and Natural brands in the