Question

In: Finance

Globe-Chem Co. has a capital structure that consists of 40% debt and 60% equity. The firm's...

Globe-Chem Co. has a capital structure that consists of 40% debt and 60% equity. The firm's current beta is 1.10, but managment wants to understand Globo-Chem Co.'s market risk without the effect of leverage. 1. If global-Chem has a 35% tax rate, what is its unlevered beta? a. 0.81 b. 0.77 c. 0.62 d. 0.92 Now consider this case of another company: U.S. Robotics Inc. has a current capital structure of 30% debt and 70% equity. Its current before tax cost of debt is 8%. and its tax rate is 35%. It curerntly has a levered beta of 1.10. The risk-free rate is 3% and the risk premium on the market is 7%. U.S. Robotics Inc. is considering changing its capital structure to 60% debt and 40% equity. Increasing the firm's level of debt will cause its before-tax cost of debt in increase ton 10%. 2. First solve for the U.S. Robotics Inc's unlevered beta. 3. Relever U.S. Robtics Inc's beta using the firm's new capital structure. 4. Use U.S. Robtics Inc's levered beta under the new capital structure, to solve for its cost of equity under the new capital structure. 5. What will the firm's weighted average cost of capital be if it makes this change to its capital structure?

Solutions

Expert Solution

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

Petro Co. has a target capital structure that consists of 60% debt, and 40% equity, the...
Petro Co. has a target capital structure that consists of 60% debt, and 40% equity, the company is considering a project (capital budget) that costs $1,500,000 for the coming year. It is forecasting net income of $800,000. 1- The equity needed for the capital budget is: * $900,000 $600,000 $480,000 $320,000 None of the above 2- If the company needs to expand its project, the dividend it can pay for shareholders is: * $0 $200,000 $320,000 $480,000 None of the...
Air France Company has a target capital structure that consists of 40% debt, and 60% equity,...
Air France Company has a target capital structure that consists of 40% debt, and 60% equity, the company is considering a project (capital budget) that costs $12,000,000 to launch five new Boeing Airplanes. Also the company has the following information: Net income $8,800,000 Total sales $36,825,000 Earnings Per Share $4.4 Price per share $68 1- The equity needed for the capital budget is: * $4,800,000 $7,200,000 $5,280,000 $3,520,000 None of the above 2- If the company needs to expand its...
16. Taylor Technologies has a target capital structure that consists of 40% debt and 60% equity....
16. Taylor Technologies has a target capital structure that consists of 40% debt and 60% equity. The equity will be financed with retained earnings. The company’s bonds have a yield to maturity of 10%. The company’s stock has a beta = 1.1. The risk-free rate is 6%, the market risk premium is 5%, and the tax rate is 30%. The company is considering a project with the following cash flows: Project A Year Cash Flow 0 -$50,000 1 35,000 2...
The Happy Company have an optimal capital structure that consists of 40% debt and 60% common equity.
WEIGHTED AVERAGE COST OF CAPITALThe Happy Company have an optimal capital structure that consists of 40% debt and 60% common equity. They expect to have $30,000,000 of new retained earnings available for investment for the next year.• BONDS. Their investment bankers assure them that they could issue $8,000,000 (net of flotation costs) of $1000 face value bonds carrying a 10% coupon rate, paying annual interest, having a 10-year maturity, at a price of $900. Flotation costs for this issue would...
David Ortiz Motors has a target capital structure of 40% debt and 60% equity.
Managerial Finance 650Problem 9-08 (WACC)David Ortiz Motors has a target capital structure of 40% debt and 60% equity. The yield to maturity on the company's outstanding bonds is 10%, and the company's tax rate is 25%. Ortiz's CFO has calculated the company's WACC as 10.2%. What is the company's cost of equity capital?Round your answer to the nearest whole number.
A company has determined that its optimal capital structure consists of 40 percent debt and 60...
A company has determined that its optimal capital structure consists of 40 percent debt and 60 percent equity. Given the following information, calculate the firm's weighted average cost of capital. Cost of Debt = 7.0%, Tax rate = 40%, Current Stock Price = $27.15, Long Run Growth rate = 4.4%, Next Year's Dividend = $1.88. Show your answer to the nearest .1%. Do not use the % sign in your answer. Enter your answer as a whole number, thus 9.2%...
A company has determined that its optimal capital structure consists of 40 percent debt and 60...
A company has determined that its optimal capital structure consists of 40 percent debt and 60 percent equity. Given the following information, calculate the firm's weighted average cost of capital. Cost of Debt = 7.0%, Tax rate = 40%, Current Stock Price = $23.72, Long Run Growth rate = 3.8%, Next Year's Dividend = $2.26. Show your answer to the nearest .1%. Do not use the % sign in your answer. Enter your answer as a whole number, thus 9.2%...
MABK Sdn Bhd has a target capital structure that consists of 60% common equity and 40%...
MABK Sdn Bhd has a target capital structure that consists of 60% common equity and 40% debt. In order to calculate MABK weighted average cost of capital, an analyst has accumulated the following information: The company’s bond will mature in 12 years; carry a coupon rate of 7.5% with interest to be paid semi-annually. The bonds have a face value of $1,000 and selling for $1,010.00 per unit. The company uses the CAPM to calculate the cost of common stock....
David Ortiz Motors has a target capital structure of 40% debt and 60% equity. The yield...
David Ortiz Motors has a target capital structure of 40% debt and 60% equity. The yield to maturity on the company's outstanding bonds is 10%, and the company's tax rate is 25%. Ortiz's CFO has calculated the company's WACC as 10.2%. What is the company's cost of equity capital? Round your answer to the nearest whole number.
Kahn Inc. has a target capital structure of 40% common equity and 60% debt to fund...
Kahn Inc. has a target capital structure of 40% common equity and 60% debt to fund its $12 billion in operating assets. Furthermore, Kahn Inc. has a WACC of 12%, a before-tax cost of debt of 9%, and a tax rate of 40%. The company's retained earnings are adequate to provide the common equity portion of its capital budget. Its expected dividend next year (D1) is $3, and the current stock price is $23. What is the company's expected growth...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT