Question

In: Finance

Bath Supplies Corp.’s capital structure is 60% debt and 40% equity. The company is planning to...

Bath Supplies Corp.’s capital structure is 60% debt and 40% equity. The company is planning to build a plant to manufacture a new type of organic toothpaste called Krud. Brightee Inc. produces only organic toothpaste. Brightee's beta is 1.2 and Brightee’s capital structure is 30% debt and 70% equity. The risk free-rate is 3% and the market premium is 7%. Bath Supplies’ after-tax cost of debt is 7%. What discount hurdle rate should Bath Supplies apply to the new plant? Use the proxy firm beta method.

Proxy WACC =

Solutions

Expert Solution

proxy WACC is used as the hurdle rate for Bath supplies Corp,

which is calculated by first taking the beta for Brightee and unlevering it using the Brightee's capital structure

Then we have to re-lever this beta as per the capital structure of Bath Supplies Corp

This beta will be used to calculate the cost of equity for Bath Supplies

and then using this and the after tax cost of debt, proxy WACC will be calculated

we have to relever the beta because the capital structure for both the firms is different

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

Jonas Corp.’s capital structure is 60% debt and 40% equity. The company is evaluating a project...
Jonas Corp.’s capital structure is 60% debt and 40% equity. The company is evaluating a project involving a new OLED screen material called Duraglass. Keiko Ltd. is currently the only producer of Duraglass. Keiko’s beta is 0.9 and Keiko’s capital structure is 25% debt and 75% equity. The risk free-rate is 3%, the market premium is 7%, and Jonas’s after-tax cost of debt is 5%. What discount hurdle rate should Jonas apply to the new project? Use the proxy firm...
The Happy Company have an optimal capital structure that consists of 40% debt and 60% common equity.
WEIGHTED AVERAGE COST OF CAPITALThe Happy Company have an optimal capital structure that consists of 40% debt and 60% common equity. They expect to have $30,000,000 of new retained earnings available for investment for the next year.• BONDS. Their investment bankers assure them that they could issue $8,000,000 (net of flotation costs) of $1000 face value bonds carrying a 10% coupon rate, paying annual interest, having a 10-year maturity, at a price of $900. Flotation costs for this issue would...
Air France Company has a target capital structure that consists of 40% debt, and 60% equity,...
Air France Company has a target capital structure that consists of 40% debt, and 60% equity, the company is considering a project (capital budget) that costs $12,000,000 to launch five new Boeing Airplanes. Also the company has the following information: Net income $8,800,000 Total sales $36,825,000 Earnings Per Share $4.4 Price per share $68 1- The equity needed for the capital budget is: * $4,800,000 $7,200,000 $5,280,000 $3,520,000 None of the above 2- If the company needs to expand its...
XYZ Company has 40% debt 60% equity as optimal capital structure. The nominal interest rate for...
XYZ Company has 40% debt 60% equity as optimal capital structure. The nominal interest rate for the company is 12% up to $5 million debt, above which interest rate rises to 14%. Expected net income for the year is $17,5 million, dividend payout ratio is 45%, last dividend distributed was $4,5/share, P0 = $37, g=5%, flotation costs 10% and corporate tax rate is 40%. a. Find the break points b. Calculate component costs (cost of each financing source) c. Calculate...
XYZ Company has 40% debt 60% equity as optimal capital structure. The nominal interest rate for...
XYZ Company has 40% debt 60% equity as optimal capital structure. The nominal interest rate for the company is 12% up to $5 million debt, above which interest rate rises to 14%. Expected net income for the year is $17,5 million, dividend payout ratio is 45%, last dividend distributed was $4,5/share, P0 = $37, g=5%, flotation costs 10% and corporate tax rate is 40%. a. Find the break points b. Calculate component costs (cost of each financing source) c. Calculate...
XYZ Company has 40% debt 60% equity as optimal capital structure. The nominal interest rate for...
XYZ Company has 40% debt 60% equity as optimal capital structure. The nominal interest rate for the company is 12% up to $5 million debt, above which interest rate rises to 14%. Expected net income for the year is $17,5 million, dividend payout ratio is 45%, last dividend distributed was $4,5/share, P0 = $37, g=5%, flotation costs 10% and corporate tax rate is 40%. a. Find the break points b. Calculate component costs (cost of each financing source) c. Calculate...
David Ortiz Motors has a target capital structure of 40% debt and 60% equity.
Managerial Finance 650Problem 9-08 (WACC)David Ortiz Motors has a target capital structure of 40% debt and 60% equity. The yield to maturity on the company's outstanding bonds is 10%, and the company's tax rate is 25%. Ortiz's CFO has calculated the company's WACC as 10.2%. What is the company's cost of equity capital?Round your answer to the nearest whole number.
Petro Co. has a target capital structure that consists of 60% debt, and 40% equity, the...
Petro Co. has a target capital structure that consists of 60% debt, and 40% equity, the company is considering a project (capital budget) that costs $1,500,000 for the coming year. It is forecasting net income of $800,000. 1- The equity needed for the capital budget is: * $900,000 $600,000 $480,000 $320,000 None of the above 2- If the company needs to expand its project, the dividend it can pay for shareholders is: * $0 $200,000 $320,000 $480,000 None of the...
David Ortiz Motors has a target capital structure of 40% debt and 60% equity. The yield...
David Ortiz Motors has a target capital structure of 40% debt and 60% equity. The yield to maturity on the company's outstanding bonds is 10%, and the company's tax rate is 25%. Ortiz's CFO has calculated the company's WACC as 10.2%. What is the company's cost of equity capital? Round your answer to the nearest whole number.
Globe-Chem Co. has a capital structure that consists of 40% debt and 60% equity. The firm's...
Globe-Chem Co. has a capital structure that consists of 40% debt and 60% equity. The firm's current beta is 1.10, but managment wants to understand Globo-Chem Co.'s market risk without the effect of leverage. 1. If global-Chem has a 35% tax rate, what is its unlevered beta? a. 0.81 b. 0.77 c. 0.62 d. 0.92 Now consider this case of another company: U.S. Robotics Inc. has a current capital structure of 30% debt and 70% equity. Its current before tax...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT