LVMH currently has a debt-to-capital ratio of 10% and an average tax rate of 34%. LVMH's...

LVMH currently has a debt-to-capital ratio of 10% and an average tax rate of 34%. LVMH's bonds have a 3% yield to maturity. Using the CAPM, the firm estimates that its cost of equity is 13%.

The firm is considering a new capital structure with a debt-to-capital ratio of 50%. An investment bank has estimated that the yield to maturity on the company's bonds would rise to 7%.

The risk-free rate is 2% and the expected equity market risk premium (MRP) is 7%.

1. What is LVMH's current WACC?

2.What is the beta of LVMH's common stock?

3.What would be the beta if the company didn't have any debt (unlevered beta)?

4. What would be the new beta if the company went ahead with the recapitalization?

5. What would be the new cost of equity and WACC after the recapitalization?

Solutions

Expert Solution

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Anderson's Furniture Outlet has an unlevered cost of capital of 10%, a tax rate of 34%,...

Anderson's Furniture Outlet has an unlevered cost of capital of 10%, a tax rate of 34%, and expected earnings before interest and taxes of $1,600. The company has $3,000 in bonds outstanding that have an 8% coupon and pay interest annually. The bonds are selling at par value. What is the cost of equity? a. 8.67% b. 10.46% c. 9.72% d. 9.34% e. 9.99%

Company A has a debt to equity ratio of 0.27 and a tax rate of 30%....

Company A has a debt to equity ratio of 0.27 and a tax rate of 30%. The covariance between Company A's historical stock returns and the S&P 500's historical stock returns, divided by the variance of the S&P 500's historical stock returns, is 0.98. What is Company A's asset beta?

Williamson, Inc., has a debt−equity ratio of 2.40. The company'sweighted average cost of capital is...

Williamson, Inc., has a debt−equity ratio of 2.40. The company's weighted average cost of capital is 11 percent, and its pretax cost of debt is 5 percent. The corporate tax rate is 30 percent. a. What is the company's cost of equity capital? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Cost of equity capital b. What is the company's unlevered cost of equity capital? (Do not round intermediate calculations....

Williamson, Inc., has a debt–equity ratio of 2.43. The company's weighted average cost of capital is...

Williamson, Inc., has a debt–equity ratio of 2.43. The company's weighted average cost of capital is 11 percent, and its pretax cost of debt is 5 percent. The corporate tax rate is 30 percent. What would the company’s weighted average cost of capital be if the company's debt–equity ratio were .65 and 1.80? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

Safeassign Corp. has a debt to equity ratio of .85. Its Weighted average cost of capital...

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....

Williamson, Inc., has a debt–equity ratio of 2.54. The company's weighted average cost of capital is...

Williamson, Inc., has a debt–equity ratio of 2.54. The company's weighted average cost of capital is 9 percent, and its pretax cost of debt is 7 percent. The corporate tax rate is 40 percent. a. What is the company’s cost of equity capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Cost of equity capital % b. What is the company’s unlevered cost of equity capital?...

Dickson, Inc., has a debt-equity ratio of 2.75. The firm’s weighted average cost of capital is...

Dickson, Inc., has a debt-equity ratio of 2.75. The firm’s weighted average cost of capital is 12 percent and its pretax cost of debt is 8 percent. The tax rate is 22 percent. a. What is the company’s cost of equity capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the company’s unlevered cost of equity capital? (Do not round intermediate calculations and enter your answer...

Dickson, Inc., has a debt-equity ratio of 2.05. The firm’s weighted average cost of capital is...

Dickson, Inc., has a debt-equity ratio of 2.05. The firm’s weighted average cost of capital is 11 percent and its pretax cost of debt is 8 percent. The tax rate is 23 percent. a. What is the company’s cost of equity capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the company’s unlevered cost of equity capital? (Do not round intermediate calculations and enter your...

Dickson, Inc., has a debt-equity ratio of 2.5. The firm’s weighted average cost of capital is...

Dickson, Inc., has a debt-equity ratio of 2.5. The firm’s weighted average cost of capital is 11 percent and its pretax cost of debt is 9 percent. The tax rate is 22 percent. a. What is the company’s cost of equity capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the company’s unlevered cost of equity capital? (Do not round intermediate calculations and enter your...

Dickson, Inc., has a debt-equity ratio of 2.7. The firm’s weighted average cost of capital is...

Dickson, Inc., has a debt-equity ratio of 2.7. The firm’s weighted average cost of capital is 11 percent and its pretax cost of debt is 7 percent. The tax rate is 21 percent. a. What is the company’s cost of equity capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the company’s unlevered cost of equity capital? (Do not round intermediate calculations and enter your...

Subjects