Question
In: Finance
1. Baxter has historically maintained a debt-equity ratio of approximately 0.25. The firm enjoys very stable...
1. Baxter has historically maintained a debt-equity ratio of approximately 0.25. The firm enjoys very stable demand for its products, and consequently can borrow at 4.20%, just 20 basis points over the risk-free rate of 4%. Baxter’s tax rate is 40%. Current market value of Baxter (including debt and equity) is 120 m. The company is expected to have free cash flows of $10 billion in perpetuity Baxter believes it can increase debt without any serious risk of distress or other costs. With a higher debt-equity ratio of 0.50, it believes its borrowing costs will rise only slightly to 4.50%.
a) Determine Baxter’s rWACC before the recapitalization and rA
b) If Baxter announces that it will raise its debt-equity ratio to 0.5 through a leveraged recapitalization, determine its new WACC
c) Determine the increase in the company value that would result from the anticipated tax savings.
Solutions
jeff jeffy answered 1 year agoRelated Solutions
Baxter has historically maintained a debt-equity ratio of approximately 0.25. The firm enjoys very stable demand...
Baxter has historically maintained a debt-equity ratio of
approximately 0.25. The firm enjoys very stable demand for its
products, and consequently can borrow at 4.20%, just 20 basis
points over the risk-free rate of 4%. Baxter’s tax rate is 40%.
Baxter’s current return on equity (rE) is 8% Baxter believes it can
increase debt without any serious risk of distress or other costs.
With a higher debt-equity ratio of 0.50, it believes its borrowing
costs will rise only slightly to...
Baxter has historically maintained a debt-equity ratio of approximately 0.25. The firm enjoys very stable demand...
Baxter has historically maintained a debt-equity ratio of
approximately 0.25. The firm enjoys very stable demand for its
products, and consequently can borrow at 4.20%, just 20 basis
points over the risk-free rate of 4%. Baxter’s tax rate is 40%.
Baxter’s current return on equity (rE) is 8%
Baxter believes it can increase debt without any serious risk of
distress or other costs. With a higher debt-equity ratio of 0.50,
it believes its borrowing costs will rise only slightly to...
Baxter has historically maintained a debt-equity ratio of approximately 0.25. The firm enjoys very stable demand...
Baxter has historically maintained a debt-equity ratio of
approximately 0.25. The firm enjoys very stable demand for its
products, and consequently can borrow at 4.20%, just 20 basis
points over the risk-free rate of 4%. Baxter’s tax rate is 40%.
Current market value of Baxter (including debt and equity) is 120
m. The company is expected to have free cash flows of $10 billion
in perpetuity
Baxter believes it can increase debt
without any serious risk of distress or other...
Prokter and Gramble (PKGR) has historically maintained a debt-equity ratio of approximately 0.15 . Its current...
Prokter and Gramble (PKGR) has historically maintained a
debt-equity ratio of approximately 0.15 . Its current stock price
is $48 per share, with 2.7 billion shares outstanding. The firm
enjoys very stable demand for its products, and consequently it
has a low equity beta of 0.375 and can borrow at 4.1%, just 20
basis points over the risk-free rate of 3.9%. The expected return
of the market is 10.3%, and PKGR's tax rate is 25%.
a. This year, PKGR is...
Prokter and Gramble (PKGR) has historically maintained a debt-equity ratio of approximately 0.24 . Its current...
Prokter and Gramble (PKGR) has historically maintained a
debt-equity ratio of approximately
0.24
.
Its current stock price is
$ 55
per share, with
2.6
billion shares outstanding. The firm enjoys very stable demand
for its products, and consequently it has a low equity beta of
0.6
and can borrow at
4.1
%,
just 20 basis points over the risk-free rate of
3.9
%.
The expected return of the market is
9.6
%,
and PKGR's tax rate is
25
%....
Prokter and Gramble (PKGR) has historically maintained a debt-equity ratio of approximately 0.18. Its current stock...
Prokter and Gramble (PKGR) has historically maintained a
debt-equity ratio of approximately
0.18. Its current stock price is $45 per share, with 2.3
billion shares outstanding. The firm enjoys very stable demand for
its products, and consequently it has a low equity beta of 0.45
and can borrow at 4.3%, just 20 basis points over the risk-free
rate of 4.1%. The expected return of the market is 10.4%, and
PKGR's tax rate is 35%.
a. This year, PKGR is expected...
Prokter and Gramble (PKGR) has historically maintained a debt-equity ratio of approximately 0.23. Its current stock...
Prokter and Gramble (PKGR) has historically maintained a
debt-equity ratio of approximately 0.23. Its current stock price is
$53 per share, with 2.9 billion shares outstanding. The firm
enjoys very stable demand for its products, and consequently it
has a low equity beta of 0.575 and can borrow at 3.7% just 20 basis
points over the risk-free rate of 3.5%.The expected return of the
market is10.1%, and PKGR's tax rate is 35%
a. This year, PKGR is expected to have...
Prokter and Gramble (PKGR) has historically maintained a debt-equity ratio of approximately 0.16. Its current stock...
Prokter and Gramble (PKGR) has historically maintained a
debt-equity ratio of approximately 0.16. Its current stock price is
$ 55 per share, with 2.8 billion shares outstanding. The firm
enjoys very stable demand for its products, and consequently it
has a low equity beta of 0.4 and can borrow at 4.7%, just 20 basis
points over the risk-free rate of 4.5%. The expected return of
the market is 9.8%, and PKGR's tax rate is 25%. a. This year,
PKGR is...
Prokter and Gramble (PG) has historically maintained a debt-to-equity ratio (D/E) of approximately 0.4. Its return...
Prokter and Gramble (PG) has historically maintained a
debt-to-equity ratio (D/E) of approximately 0.4. Its return on
equity is 7.5% and it can borrow at 4.3%. PG’s tax rate is 40%.
PG believes it can increase debt without any serious risk of
distress or other costs. With a higher debt-to-equity ratio of 0.6,
it believes its borrowing costs will rise only slightly to
4.6%.
Determine PG’s current asset return rA (before
increasing its debt-to-equity ratio)
Determine PG’s cost of capital...
a firm has total assets of $79,600, cash of $25,000 and a debt-equity ratio of 0.25....
a firm has total assets of $79,600, cash of $25,000 and a
debt-equity ratio of 0.25. What is the equity multiplier?
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- MARGI sells different types of wine. Customers place orders to the most popular “Summer Wine” at...
- Java. If possible please put explanations for each line of code. Write a test program that...
- . Use the following information to calculate your company's expected return State Probability Return Boom 20%...
- You are considering the following two projects and can only take one. Your cost of capital...
- C++: Write a program that produces truth tables for the following compound propositions. Write the header...
- 1. What is the historical role of investment bankers ? Has this role changed ? Why...
- How were the original Internet requirements met through its design? What are the two main requirements...
ADVERTISEMENT