Homework Answers
| Levered cost of equity = Unlevered cost of equity+D/E*( Unlevered cost of equity-cost of debt)*(1-tax rate) |
| 18 = 12+0.6*(12-Cost of debt)*(1-0) |
| Cost of debt% = 2 |
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Jackson is an all-equity financed firm; its common stock has an expected return of 12%. Jackson...
Hector Enterprises is currently financed with all equity, and its cost of equity capital is 15% debt, and using the mon...
Hector Enterprises is currently financed with all equity, and its cost of equity capital is 15% debt, and using the money raised through the debt issue to repurchase some of the outstanding shares of common stock. Assume perfect markets A. Suppose Hector issues debt to the point that its debt-equity ratio is .50 What would be Hector's new cost of equity capital? Hector is considering issuing The debt would then have a market yield of 5%.
Washington Beltway is consulting firm financed entirely by common stock and has 15M shares outstanding with...
Washington Beltway is consulting firm financed entirely by common stock and has 15M shares outstanding with a price of $2 per share. It earnings per share are $0.20 and it has a required return on equity (unlevered) of 10%. It announces that it intends to issue $10M of debt and use the proceeds to buy back common stock at market prices. a. How many shares should the company be able to buy back with the $10m proceeds from the debt...
An all-equity firm has 100,000 shares of common stock outstanding. Investors require a 25% return on the firm’s equity....
An all-equity firm has 100,000 shares of common stock outstanding. Investors require a 25% return on the firm’s equity. The firm is expected to live for one year. Its end-of-year cash flows can be $1M, $2M, $3M, $4M, and $5M with equal probabilities. There are no corporate or personal taxes, and no bankruptcy costs. a) What is the value of the firm b) Suppose the firm issues debt with face value of $1M maturing in a year with no coupons,...
Yerba Industries is an all-equity firm whose stock has a beta of 1.10 and an expected...
Yerba Industries is an all-equity firm whose stock has a beta of 1.10 and an expected return of 14.5 %. Suppose it issues new risk-free debt with a 5 % yield and repurchase 35 % of its stock. Assume perfect capital markets. a. What is the beta of Yerba stock after this transaction? b. What is the expected return of Yerba stock after this transaction? Suppose that prior to this transaction, Yerba expected earnings per share this coming year of...
Yerba Industries is an all-equity firm whose stock has a beta of 0.60 and an expected...
Yerba Industries is an all-equity firm whose stock has a beta of 0.60 and an expected return of 13 %. Suppose it issues newrisk-free debt with a 6 % yield and repurchase 10 % of its stock. Assume perfect capital markets. a. What is the beta of Yerba stock after this transaction? b. What is the expected return of Yerba stock after thistransaction? Suppose that prior to this transaction, Yerba expected earnings per share this coming year of $ 0.50,...
Hardmon Enterprises is currently an all-equity firm with an expected return of 14.3%. It is considering...
Hardmon Enterprises is currently an all-equity firm with an expected return of 14.3%. It is considering a leveraged recapitalization in which it would borrow and repurchase existing shares. Assume perfect capital markets. a. Suppose Hardmon borrows to the point that its debt-equity ratio is 0.50. With this amount of debt, the debt cost of capital is 4%. What will be the expected return of equity after this transaction? b. Suppose instead Hardmon borrows to the point that its debt-equity ratio...
rdmon Enterprises is currently an all-equity firm with an expected return of 3.5% t is considering...
rdmon Enterprises is currently an all-equity firm with an expected return of 3.5% t is considering a leveraged recapitalization in which would borrow and repurchase existing shares. Assume perfect capital markets. a. Suppose Hardmon borrows to the point that its debt-equity ratio is 0.50 with this amount of debt, the debt cost of capital is 6%. What will be the expected return of equity after this transaction? b. Suppose instead Hardmon borrows to the point that its debt-equity ratio is...
Yerba Industries is an all-equity firm whose stock has a beta of 0.60 and an expected return of 20%. Suppose it issues new risk-free debt with a 6% yield and repurchase 5% of its stock. Assume perfect capital markets. a. What is the beta of Yerba st
Yerba Industries is an all-equity firm whose stock has a beta of 0.60 and an expected return of 20%. Suppose it issues new risk-free debt with a 6% yield and repurchase 5% of its stock. Assume perfect capital markets. a. What is the beta of Yerba stock after this transaction? b. What is the expected return of Yerba stock after this transaction?Suppose that prior to this transaction, Yerba expected earnings per share this coming year of $3.00, with a forward P/E ratio (that is, the share price...
Roll Corporation has 20,000 shares of common stock outstanding. It's financed entirely with equity. The un-levered...
Roll Corporation has 20,000 shares of common stock outstanding. It's financed entirely with equity. The un-levered cost of capital is 14%. The company distributes all of its earnings to equity holders as dividends at the end of each year. And Roll Corporation is subject to a corporate tax rate of 30%. Roll Corporation estimates that its annual EBIT will be as follow: 20% Bust with EBIT 2600, 50% Expected with EBIT 3620, 30% Expansion with EBIT 4900. The firm expects...
Roll Corporation has 20,000 shares of common stock outstanding. It's financed entirely with equity. The un-levered...
Roll Corporation has 20,000 shares of common stock outstanding. It's financed entirely with equity. The un-levered cost of capital is 14%. The company distributes all of its earnings to equity holders as dividends at the end of each year. And Roll Corporation is subject to a corporate tax rate of 30%. Roll Corporation estimates that its annual EBIT will be as follow: 20% Bust with EBIT 2600, 50% Expected with EBIT 3620, 30% Expansion with EBIT 4900. The firm expects...
Hector Enterprises is currently financed with all equity, and its cost of equity capital is 15% debt, and using the money raised through the debt issue to repurchase some of the outstanding shares of common stock. Assume perfect markets A. Suppose Hector issues debt to the point that its debt-equity ratio is .50 What would be Hector's new cost of equity capital? Hector is considering issuing The debt would then have a market yield of 5%.
Hardmon Enterprises is currently an all-equity firm with an expected return of 14.3%. It is considering a leveraged recapitalization in which it would borrow and repurchase existing shares. Assume perfect capital markets. a. Suppose Hardmon borrows to the point that its debt-equity ratio is 0.50. With this amount of debt, the debt cost of capital is 4%. What will be the expected return of equity after this transaction? b. Suppose instead Hardmon borrows to the point that its debt-equity ratio...
rdmon Enterprises is currently an all-equity firm with an expected return of 3.5% t is considering a leveraged recapitalization in which would borrow and repurchase existing shares. Assume perfect capital markets. a. Suppose Hardmon borrows to the point that its debt-equity ratio is 0.50 with this amount of debt, the debt cost of capital is 6%. What will be the expected return of equity after this transaction? b. Suppose instead Hardmon borrows to the point that its debt-equity ratio is...
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