Electric Youth, Inc. (EY) is a publicly-traded firm that is the market share leader in perfume...

Electric Youth, Inc. (EY) is a publicly-traded firm that is the market share leader in perfume for teenagers. You are charged with estimating the cost of capital for the firm. The following market data on EY’s securities are current:

Debt	10,000 seven percent coupon bonds outstanding, 15 years to maturity, selling for 92 percent of par; the bonds have a $1,000 par value each and make annual payments.
Common stock	250,000 shares outstanding, selling for $55 per share; the beta is 1.4.
Market	7 percent expected market risk premium; 5 percent risk-free rate.

EY’s tax rate is 22 percent.

To do: estimate EY’s cost of capital. Show all work.

Solutions

Expert Solution

Calcuate cost of Debt and Cost of Equity

COst of Debt = Intrest payment (1-Tax)/Total debt

Cost of debt = ((10000*1000)*7%)*(1-0.22)/10000*1000 = 5.46%

Cost of Equity = Risk free rate + (beta * Market premium)

COst of equity = 5+(1.4*7) = 14.8

WACC = Cost of equity * Market value of Equity/(Market value of equity+Market value of Debt) + Cost of debt * Market value of debt/(Market value of equity+Market value of Debt)

Market value of Debt = 10000*920 = 9200000

MArket value of Equity = 250000*55 = 13750000

WACC = 14.8*13750000/(9200000+13750000) + 5.46*9200000/(9200000+13750000) = 12.138%

jeff jeffy answered 2 years ago

Next > < Previous

Related Solutions

MECAB is a large, publicly traded firm that is the market share leader in Electric Cables...

MECAB is a large, publicly traded firm that is the market share leader in Electric Cables manufacturing and distribution. The current market data on MECAB securities is as follows: Debt: 130,000 7 percent coupon bonds outstanding, 15 years to maturity, selling for 94 percent of par; with a $100 par value and making semiannual payments. Common stock: 6,000,000 shares outstanding, selling for 52 per share; the beta is 1.2. Preferred stock: 300,000 shares of preferred stock outstanding, paying a dividend...

Electric Youth, Inc. (EY) is a perfume manufacturer. The companyis interested in buying a new...

Electric Youth, Inc. (EY) is a perfume manufacturer. The company is interested in buying a new perfume-filling machine to make a new type of perfume as a separate project for the firm. The new machine costs $1,000,000 and they typically use the straight-line method to depreciate their assets. They believe that with the new machine, revenues from this particular type of perfume will increase by $650,000 per year. Operating costs (not including depreciation) associated with the machine are estimated to...

Electric Youth, Inc. (EY) is a perfume manufacturer. The company is interested in buying a new...

Defense Electronics, Inc. (DEI), a large publicly traded firm is the market share leader in radar...

Defense Electronics, Inc. (DEI), a large publicly traded firm is the market share leader in radar detection systems (RDSs), is considering a new project producing a new line of RDSs. The project will last 5 years and is expected to generate the following net cash flows (CFFA): Year CFFA 1 $12,450,000 2 $12,450,000 3 $12,450,000 4 $12,450,000 5 $26,575,000 a) The initial cost of this project is $38,600,000. If the appropriate discount rate for this project is 12.31%, what is...

Defense Electronics, Inc. (DEI), a large publicly traded firm is the market share leader in radar...

Defense Electronics, Inc. (DEI), a large publicly traded firm is the market share leader in radar detection systems (RDSs), has asked you to compute the cost of debt for the firm. The cost of debt is equivalent to the required return to debtholders, or the firm’s YTM. Using the information provided below, compute the firm’s cost of debt and the total market value of the firm’s debt. Debt: 230,000 7.2 percent coupon bonds outstanding, 25 years to maturity, selling...

Harrison Holdings, Inc. (HHI) is publicly traded, with a current share price of $31 per share....

Harrison Holdings, Inc. (HHI) is publicly traded, with a current share price of $31 per share. HHI has 28 million shares outstanding, as well as $65 million in debt. The founder of HHI, Harry Harrison, made his fortune in the fast food business. He sold off part of his fast food empire, and purchased a professional hockey team. HHI's only assets are the hockey team, together with 50% of the outstanding shares of Harry's Hotdogs restaurant chain. Harry's Hotdogs (HDG)...

For the question' Fan Plc is a publicly traded firm. The market value of its equity...

For the question' Fan Plc is a publicly traded firm. The market value of its equity is $70 million and its debt $30 million. The yield to maturity of the debt is 5%, the shareholders require a 20% return, and the company pays 30% corporate tax. They have recently decided to repurchase $10 million worth of equity, and finance the repurchase through the issuance of new debt. 1, How will the return on equity be affected by this change?What is...

DB, Inc. is publicly traded with a stock price of $50 per share and 200,000,000 shares...

DB, Inc. is publicly traded with a stock price of $50 per share and 200,000,000 shares outstanding. It also expects to have total net earnings of $400,000,000. DB has $200 million in surplus cash that it wants to pay to shareholders. One option is to pay a special dividend. The other option is to repurchase stock with the cash. Evaluate the two alternatives below (ignoring any information effects): a. What is the price of the company’s stock if it announces...

Harrison Holdings, Inc. (HHI) is publicly traded, with a current share price of $ 40 per...

Harrison Holdings, Inc. (HHI) is publicly traded, with a current share price of $ 40 per share. HHI has 30 million shares outstanding, as well as $ 61 million in debt. The founder of HHI, Harry Harrison, made his fortune in the fast food business. He sold off part of his fast food empire, and purchased a professional hockey team. HHI's only assets are the hockey team, together with 50 % of the outstanding shares of Harry's Hotdogs restaurant chain....

JJP Corporation is a publicly traded firm. The market value of its equity is£35,000,000 and its...

JJP Corporation is a publicly traded firm. The market value of its equity is£35,000,000 and its debt £15,000,000. The yield to maturity of the debt is 5%, the equity–holders require a 20% return, and the company pays 30% corporate tax. They have recently decided to repurchase £5,000,000 worth of equity, and finance the repurchase through the issuance of new debt. a) Will this change in capital structure affect the market value of the firm? b) How will the return on...

Subjects