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In: Finance
Serendipity Inc. is re-evaluating its debt level. Its current capital structure consists of 80% debt and...
Serendipity Inc. is re-evaluating its debt level. Its current capital structure consists of 80% debt and 20% common equity, its beta is 1.60, and its tax rate is 25%. However, the CFO thinks the company has too much debt, and he is considering moving to a capital structure with 40% debt and 60% equity. The risk-free rate is 5.0% and the market risk premium is 6.0%. By how much would the capital structure shift change the firm's cost of equity?
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Solutions
jeff jeffy answered 8 months agoRelated Solutions
Serendipity Inc. is re-evaluating its debt level. Its current capital structure consists of 80% debt and...
Serendipity Inc. is re-evaluating its debt level. Its current
capital structure consists of 80% debt and 20% common equity, its
beta is 1.60, and its tax rate is 25%. However, the CFO thinks the
company has too much debt, and he is considering moving to a
capital structure with 40% debt and 60% equity. The risk-free rate
is 5.0% and the market risk premium is 6.0%. By how much would the
capital structure shift change the firm's cost of equity?...
A firm is planning to change its capital structure. Its current capital structure consists of 70%...
A firm is planning to change its capital structure. Its current
capital structure consists of 70% common equity, 20% debt, and 10%
preferred stock. The pre-tax cost of debt is 4%, cost of preferred
stock is 6% and cost of common equity is 11%. What is the change in
its WACC (indicate an increase or a decrease in WACC) if this firms
plan to adopt a new capital structure with 60% common equity, 25%
debt, and 15% preferred stock if...
Flashtronics is trying to determine its optimal capital structure. The company’s capital structure consists of debt...
Flashtronics is trying to determine its optimal capital
structure. The company’s capital structure consists of debt and
common stock. In order to estimate the cost of debt, the
company has produced the following table:
Debt-to-total- Equity-to-total- Debt-to-equity Bond B-T
cost
assets ratio
(wd) assets
ratio
(wc) ratio
(D/E) rating of
debt
0.10 0.90 0.10/0.90
=
0.11 AA 6.0%
0.20 0.80 0.20/0.80
=
0.25 A 6.6
0.30 0.70 0.30/0.70
=
0.43 A 7.3
0.40 0.60 0.40/0.60
=
0.67 BB 7.9
0.50 0.50 0.50/0.50
=
1.00 B 8.7
The company’s tax rate is 35 percent.
The company currently has a D/E ratio of 20% and uses the CAPM
to estimate...
Assume that with a capital structure of 20% debt and 80% equity the cost of debt...
Assume that with a capital structure of 20% debt and 80% equity
the cost of debt is 10% and cost of equity is 14%. The tax rate is
40%. The current value of the business is $ 500,000. The finance
manager of the company is recommending a change of capital
structure to 80% debt and 20% equity. He states that at effective
cost of debt of 10% the increase of debt in capital structure would
always increase the value of...
Flavortech Inc. expects EBIT of $3,000,000 for the current year. The firm's capital structure consists of...
Flavortech Inc. expects EBIT of $3,000,000 for the current year.
The firm's capital structure consists of 30 percent debt and 70
percent equity, and its marginal tax rate is 40 percent. The cost
of equity is 14 percent, and the company pays a 10 percent rate on
its $5,000,000 of long-term debt. One million shares of common
stock are outstanding. For the next year, the firm expects to fund
one large positive NPV project costing $1,200,000, and it will fund...
Bailey and Sons has a levered beta of 1.10, its capital structure consists of 40% debt...
Bailey and Sons has a levered beta of 1.10, its capital
structure consists of 40% debt and 60% equity, and its tax rate is
25%. What would Bailey's beta be if it used no debt, i.e., what is
its unlevered beta?
A company has determined that its optimal capital structure consists of 40 percent debt and 60...
A company has determined that its optimal capital structure
consists of 40 percent debt and 60 percent equity. Given the
following information, calculate the firm's weighted average cost
of capital. Cost of Debt = 7.0%, Tax rate = 40%, Current Stock
Price = $27.15, Long Run Growth rate = 4.4%, Next Year's Dividend =
$1.88. Show your answer to the nearest .1%. Do not use the % sign
in your answer. Enter your answer as a whole number, thus 9.2%...
A company has determined that its optimal capital structure consists of 40 percent debt and 60...
A company has determined that its optimal capital structure
consists of 40 percent debt and 60 percent equity. Given the
following information, calculate the firm's weighted average cost
of capital. Cost of Debt = 7.0%, Tax rate = 40%, Current Stock
Price = $23.72, Long Run Growth rate = 3.8%, Next Year's Dividend =
$2.26. Show your answer to the nearest .1%. Do not use the % sign
in your answer. Enter your answer as a whole number, thus 9.2%...
Debt-free, Inc., an unlevered firm, is planning to use debt in its capital structure. The firm...
Debt-free, Inc., an unlevered firm, is planning to use debt in
its capital structure. The firm currently has 5,000 shares
outstanding trading at $60 per share. The firm plans to sell 150 6%
annual-coupon, 10-year bonds at their face values of $1,000 each
and use the proceeds to repurchase some of its shares. When the
bonds mature, Debt-free, Inc. plans to reissue new bonds to pay off
the principal and to “roll over” its debt this way indefinitely.
Assume the...
Case 2 – Capital Structure PT Kreasi Nusantara plans to re-structure its capital due to the...
Case 2 – Capital
Structure
PT Kreasi Nusantara plans to re-structure its capital due to
the demand of some shareholders who would with draw their shares
from company’s equities. To maintain a level of total assets, the
company should either increase long-term debts or issue common
shares to other shareholders (could be through private placement or
initial public offering). Using 2 theories of capital structure,
explain how does PT Kreasi Nusantara re-structure its capital!
(20%)
Discuss why the dividends payment...
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