Question
In: Finance
One of your new employees notes that your debt has a lower cost of capital (5%)...
One of your new employees notes that your debt has a lower cost of capital (5%) than your equity (15%). So, he suggests that the firm swap its capital structure from 26% debt and 74% equity to 74% debt and 26% equity instead. He estimates that after the swap, your cost of equity would be 21%.
a. What would be your new cost of debt? Make your calculations based on your firm's pre-tax WACC.
b. Have you lowered your overall cost of capital?
Solutions
jeff jeffy answered 1 year agoRelated Solutions
8. One of your new employees notes that your debt has a lower cost of capital...
8. One of your new employees notes that your debt has a lower
cost of capital (4%) than your equity (13%). So, he suggests that
the firm swap its capital structure from 31% debt and 69% equity
to 69% debt and 31% equity instead. He estimates that after the
swap, your cost of equity would be 18%.
a. What would be your new cost of debt? Make your calculations
based on your firm's pre-tax WACC.
b. Have you lowered your...
Debt generally has a lower cost of capital to a company, due to lower flotation costs,...
Debt generally has a lower cost of capital to a company, due to
lower flotation costs, lower risk taken by debt holders and benefit
of a tax shield received from writing off interest expense on a
corporate's income statement.
1. a. Explain why the cost of debt is lower than the cost of capital? 1....
1. a. Explain why the cost of debt is lower than the cost of
capital?
1. b. Explain what is meant by the statement- depreciation is a
non-cash expense and how do companies use it.
1. c. How long does it take money earning 12% to double? Use
both the rule of 72 and your financial calculator.
1. d. Explain the three ways a company can raise capital.
1. e. If an investor has a short term view on her...
Flagstaff Enterprises has an equity cost of capital of 13%, a debt cost of capital of...
Flagstaff Enterprises has an equity cost of capital of 13%, a
debt cost of capital of 7%, and a corporate tax rate of 35%. At
present, Flagstaff has a 0.80 debt-equity ratio and plans to
maintain it (at 0.80) in the future. Flagstaff expects to have a
free cash flow in the coming year of $8 million, and this free cash
flow is expected to grow at a rate of 3% per year thereafter
(forever).
a) Calculate the value of...
Restex has a debt-equity ratio of 0.76, an equity cost of capital of 18 %, and a debt cost of capital of 9 %.
Restex has a debt-equity ratio of 0.76, an equity cost of capital of 18 %, and a debt cost of capital of 9 %.
Restex's corporate tax rate is 30%, and its market capitalization is $ 199 million.
a. If? Restex's free cash flow is expected to be $5 million one year from now and will grow at a constant? rate, what expected future growth rate is consistent with?Restex's current market? value?
b. Estimate the value of Restex's interest tax...
4. Cost of debt versus cost of equity. Because the cost of debt is lower than...
4. Cost of debt versus cost of equity. Because the cost of debt
is lower than the cost of equity, firms must increase their use of
debt as much as possible to increase the firm’s value. What is your
answer to this argument?
It is not uncommon to hear people say that because debt has a lower cost of...
It is not uncommon to hear people say that because debt has a
lower cost of capital than equity, a firm can reduce its overall
WACC by increasing the amount of debt financing. If this strategy
works, shouldn’t a firm take on as much debt as possible, at least
as long as the debt is not risky? Explain your answer using M&M
Proposition II
Which is lower for a given company: the cost of debt or the cost of equity?...
Which is lower for a given company: the cost of debt or the cost
of equity? Explain. Ignore taxes in your answer. Include a
discussion of the risk-return relationship and how this factors
into an investor's decision to select and investment for their
portfolio.
[Q1-5] The debt-to-equity ratio of your firm is currently 1/2. Under this capital structure, the cost...
[Q1-5] The debt-to-equity ratio of your firm is currently 1/2.
Under this capital structure, the cost of equity is 12%. You are
planning to change your firm’s capital structure so that the new
debt-to-equity ratio becomes 2. The change in the debt-to-equity
ratio is expected to be permanent. Assume that regardless of the
firm’s capital structure, the cost of debt is 6% and the corporate
tax rate is 40%.
What is the WACC under the current capital structure?
A.
10%...
1) One of your employees has suggested that your company develop a new product. You decide...
1) One of your employees has suggested that your company develop
a new product. You decide to take a random sample of your customers
and ask whether or not there is interest in the new product. The
response is on a 1 to 5 scale with 1 indicating "definitely would
not purchase"; 2, "probably would not purchase"; 3, "not sure"; 4,
"probably would purchase"; and 5, "definitely would purchase." For
an initial analysis, you will record the responses 1, 2,...
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