MOOOHOOO Corp (MH) has debt to equity ratio of 1 and an equity beta of 1.90....

MOOOHOOO Corp (MH) has debt to equity ratio of 1 and an equity beta of 1.90. Currently MH’s debt cost of capital is 5.5%. If MH is considering a change: by issuing debt to buyback stock to have a debt-equity ratio of 2 that it will maintain this ratio forever. With this change assume MH’s cost of debt capital will be 6% and their tax rate is 35%. If the expected market return is 9% and the risk free rate is 5% answer the following questions:

7) What is the current equity cost of capital of the firm?

r_e=.151
r_e= .144
r_e= .126
r_e= .101
r_e= .091

Solutions

Expert Solution

Equity Beta = 1.90

Expected market return (R_m) = 9%

Risk free rate of return (R_f)= 5%

Current equity cost of capital by CAPM formula can be calculated by:

R_e = R_f + (R_m - R_f) * Beta

R_e = 0.05 + (0.09 - 0.05) * 1.90

R_e = 0.05 + 0.04*1.90

R_e = 0.05 + 0.076

R_e = 0.126

The correct answer is C i.e. r_e= 0.126

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

EQUATION 9.6 - beta of equity = beta of asset * (1 + (1-T) debt-equity ratio)...

EQUATION 9.6 - beta of equity = beta of asset * (1 + (1-T) debt-equity ratio) The asset beta for a particular industry is 0.75. Use Equation 9.6 to estimate the equity betas for the following three firms based on their respective debt ratios and tax rates. Then calculate each firm's cost of equity assuming an expected market premium of 6% and a risk-free rate of 4%. Firm A: 75% debt ratio and 35% tax rate Firm B: 20% debt...

The beta of the equity of CDE Company is 1.67 and CDE has a debt-to-equity ratio...

The beta of the equity of CDE Company is 1.67 and CDE has a debt-to-equity ratio of 0.67 calculated at market values. The debt is risk-free and perpetual. CDE generates annual EBIT of $100 and has 100 shares of common stock outstanding. The expected return on the market portfolio is 15% and the risk-free interest rate is 5%. The corporate tax rate is 30%. Assume that personal taxes and bankruptcy costs are not relevant. 1. Compute the current market value...

A firm has a debt-to-equity ratio of 50%. The firm’s equity beta is 1.5 and the...

A firm has a debt-to-equity ratio of 50%. The firm’s equity beta is 1.5 and the cost of debt is 6%. Assume the market risk premium is 6%, the 10-year Treasury bond yield is 3%, and the corporate income tax rate is 40%. Estimate the firm’s WACC. Estimate the firm’s unlevered cost of equity, ku. (Hint: Since the debt ratio is constant, you can assume ktax = ku. Use Equation 3c2.) If the firm plans to increase the debt-to-equity ratio...

A company has a debt-to-equity ratio of 1/4 in terms of market values. Its equity beta...

A company has a debt-to-equity ratio of 1/4 in terms of market values. Its equity beta is 1.15 and its cost of debt is 3.5%. Its tax rate is expected to be 20%. Assume the risk-free rate of 3% and the market risk premium of 7%. What is its weighted average cost of capital (WACC)?

Firm A has a beta of 1.3 and a debt-to-equity ratio of 0.4 and an interest...

Firm A has a beta of 1.3 and a debt-to-equity ratio of 0.4 and an interest rate of 9% on its debt. It has chosen Firm P as a proxy for a new line of business it is considering. Firm P has a beta of 1.6 and a debt to equity ratio of 0.8 and the expected return on the S&P 500 is 12% and the risk-free rate is 5.5%. The marginal tax rate is 40%. A. Find the correct...

A semiconductor company has an equity beta of 1.8, a debt-to-equity ratio of 0.05, an average...

A semiconductor company has an equity beta of 1.8, a debt-to-equity ratio of 0.05, an average cost of debt of 6.0% p.a., and an effective income tax rate of 12%. The current rate on long-term U.S. government Treasury Bills is 2.2% p.a. The market risk premium (R M -R F ) pertaining to a diversified portfolio of corporate common stock is about 8.4% p.a. Estimate this company’s cost of equity and its weighted average cost of capital. If the company...

Firm X has a beta of 1.3 and a debt-to-equity ratio of 0.7 . It has...

Firm X has a beta of 1.3 and a debt-to-equity ratio of 0.7 . It has deb with a coupon of 8%, face value of $1,000 and yield-to-maturity of 12%. It has chosen firm P as a proxy company for a new project it is considering in a totally different line of business from its present one. Firm P has a beta of 1.6 and debt-to-equity ratio of 0.4 and a bond with yield-to-maturity of 10%, a coupon of 12%...

Firm X has a beta of 1.3 and a debt-to-equity ratio of 0.7 . It has...

The Black Knight has a debt-equity ratio of .6, a beta of 1.12, a stock price...

The Black Knight has a debt-equity ratio of .6, a beta of 1.12, a stock price of $42 a share, and a tax rate of 34 percent. The firm just paid an annual dividend of $.80 a share and plans to increase that amount by 3 percent annually in the future. The firm has a pre-tax cost of debt of 7.7 percent. The risk-free rate is 3.8 percent and the market rate of return is 8.4 percent. What is Black...

Trower Corp. has a debt–equity ratio of .85. The company is considering a new plant that...

Trower Corp. has a debt–equity ratio of .85. The company is considering a new plant that will cost $104 million to build. When the company issues new equity, it incurs a flotation cost of 7.4 percent. The flotation cost on new debt is 2.9 percent. What is the initial cost of the plant if the company raises all equity externally? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer...

Subjects