Question

Safeassign Corp. has a debt to equity ratio of .85. Its Weighted average cost of capital is 9.9% and the tax rate is 35%. If Safeassign’s after-tax cost of debt is 6.8%, what is the cost of equity?

ii. Safeassign Corp. has a debt to equity ratio of .85. Its Weighted average cost of capital is 9.9% and the tax rate is 35%. If Safeassign’s cost of equity is 14% what is the pre-tax cost of debt?

iii. Safegaurd Inc. has a weighted average cost of capital of 8.5%. The company’s cost of equity is 11% and its pretax cost of debt is 6.1%. The tax rate is 35%. What is the company’s target debt-equity ratio?

iv. Three years ago JJ Inc. issued 30-year bonds paying 7% semi-annually with a par value of $1,000. These bonds currently sell at 93% of their Face Value. The company’s tax rate is 35%. What is the After-Tax cost of debt?

v. Three years ago JJ Inc. issued 30-year bonds paying 7% semi-annually with a par value of $1,000. These bonds currently sell at 93% of their Face Value. The company’s tax rate is 35%. What is the pre-tax cost of debt?

vi. Excel corp common stock has a beta of 1.15. Government T-Bills are yielding 3.5% and the expected return on the market index is 11%. The company’s cost of capital would be.

vii. Tata Inc. is planning to increase its dividend by 10% for the next three years and then decrease its growth rate to only 4% per year. Last week the company paid its dividend of $1 per share. If the required rate of return is 13.75% what is the value of one share?

viii. Indian Coal Inc paid a dividend of $1.50 per share. Over the next four years the company is planning on paying the following dividends $3.00, $5.00, $7.50, and $10.00 respectively. After that the dividend will be $2.50 per share per year. What is the price of this stock if the market rate of return is 15%.

ix. Raj Export Inc. plans to pay a $3 per share dividend in 11 years from now, and will increase the dividend by 6% per year thereafter. If the required return on this stock is 15%, what is the current share price?

x. A company will sell 1,000 widgets at $164 per widget at cost of $87 each. CCA is $15,200 and the tax rate is 35%. What is the operating cashflow?

Answer 1

i)after tax cost of debt =6.8%

pre taxcost of debt = 6.8/(1-0.35) = 10.5%

debt equity ratio =0.85

debt/equity =0.85

weight of debt = 0.85/1.85

weight of equity = 1/1.85

weighted average cost of capital = weight of equity * cost of equity + weight of debt * cost of debt (1-taxrate)

9.9 =1/1.85*cost of equity + (0.85/1.85*10.5)(1-0.35)

9.9= 0.54* cost of equity + 3.13

9.9-3.13 = 0.54 * cost of equity

6.77/0.54 = cost of equity

so,cost of equity = 12.54%

ii)given, debt equity ratio = 0.85

weight of debt =0.85/1.85

weight of equity = 1/1.85

weighted average cost of caoital = 9.9%

cost of equity =14%

tax rate =35%

weighted average cost of capital =weight of equity * cost of equity + weight of debt * cost of debt (1-taxrate)

9.9= 1/1.85*14 + (0.85/1.85*cost of debt)(1-0.35)

9.9=7.57 + (0.47*cost of debt)*0.65

9.9-7.57 = 0.47*cost of debt * 0.65

2.33/0.47/0.65= cost of debt

cost of debt =7.63%

iii)wacc=8.5%

cost of equity=11%

pretax cost of debt= 6.1%

tax rate =35%

let the percentage of equity be x

so,percentage  of debt = 1-x

weighted average cost of capital =weight of equity * cost of equity + weight of debt * cost of debt (1-taxrate)

8.5= x*11 + [(1-x)*6.1](1-0.35)

8.5=11x + [6.1-6.1x]*0.65

8.5= 11x + 3.965 - 3.965x

8.5= 7.035x +3.965

8.5-3.965= 7.035x

4.535/7.035= x

x= 64.45%

percentage of debt = 35.55%

debt equity ratio =35.55/64.45= 0.55

x) sales =1000*$164 = $164000

Cost of widgets = 1000*87 = $87000

gross profit = 164000-87000 = $77000

earning before tax= gross profit - cca

= 77000-15200 =$61800

tax= 61800*35% =21630

operating cash flow = operating income + cca - taxes

= 77000+15200-21630

=$ 70570