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% and face value of $1,000.
Both firms are in the 40 percent marginal tax bracket. The expected return on the S&P is 13% and the rate on 90-day Treasury bill is 3%.
Find the required return on the new project that Firm X is considering. Show all formulae, steps and calculations neatly and in the proper sequence.

Solutions

Expert Solution

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

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

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 firm is considering a project that is virtually risk-free. The company has a beta of 1.3 and a debt-equity ratio of.4

A firm is considering a project that is virtually risk-free. The company has a beta of 1.3 and a debt-equity ratio of.4. The appropriate discount rate to use in analyzing this project is: Multiple ChoiceThe cost of equity capital.Zero.The Treasury bill rate.An adjusted WACC based on a beta of 1.0.The firm's latest WACC.

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...

If a company has a debt to equity ratio of 1.3, then the equity multiplier is...

If a company has a debt to equity ratio of 1.3, then the equity multiplier is approximately: 1. 2.3 2. 1.3 3. 2.6

Isolation Company has debt-equity ratio of 0.7. Return on Assets is 9% and total equity is...

Isolation Company has debt-equity ratio of 0.7. Return on Assets is 9% and total equity is 511,312. What is the Net Income

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...

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...

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...

A firm is financed with debt that has a market beta of 0.3 and equity that...

A firm is financed with debt that has a market beta of 0.3 and equity that has a market beta of 1.2. The risk-free rate is 3%, and the equity premium is 5%. The overall cost of capital for the firm is 8%. What is the firmʹs debt-equity ratio? a) 28.6% b) 25.0% c) 74.8% d) 25.2%

Subjects