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Question 9: ECRI Corporation is a holding company with four main subsidiaries. The percentage of its...
Thunderhorse Oil is a U.S. oil company. Its current cost of debt is 7.00%, and the...
Thunderhorse Oil is a U.S. oil company. Its current cost of debt is 7.00%, and the 10-year U.S. Treasury yield, the proxy for the risk-free rate of interest, is 3.60%. The expected return on the market portfolio is 8.20%. The company's effective tax rate is 39%. Its optimal capital structure is 45% debt and 55% equity. 1. If Thunderhorse's beta is estimated at 0.70, what is Thunderhorse's weighted average cost of capital? 2.If Thunderhorse's beta is estimated at 0.20, significantly...
Crowley Company has a capital structure with 35% debt at a 9% interest rate. Its beta is...
Crowley Company has a capital structure with 35% debt at a 9% interest rate. Its beta is 1.3, the risk-free rate is 1.5%, and the market risk premium is 10%. The company has no preferred stock. Its combined federal-plus-state tax rate is 25%. a. Calculate the company's cost of equity b. Calculate the company's weighted average cost of capital c. Calculate the company's unlevered cost of equity
When firms consider issuing equity, or 'stock', which is a share in the ownership in the...
When firms consider issuing equity, or 'stock', which is a share in the ownership in the firm, the cost can be estimated by using a number of approaches. The most frequently used today is the capital asset pricing model (CAPM). This model says that the market-required return on any capital asset (equity or stock being examples of 'capital assets') can be estimated by considering the risk-free rate of return, because investing means that consumption must be delayed, plus an adjustment...
Question 2 (5 points) Athletics is trying to determine its optimal capital structure. The company's capital ructure...
Question 2 (5 points) Athletics is trying to determine its optimal capital structure. The company's capital ructure consists of debt and common stock. In order to estimate the cost of debt, the company has produced the following table: Percent financed P ercent financed Debt-to-equity ratio Bond Before-tax cost with equity (We) of debt rating (D/S) 0.20/0.80 = 0.25 AA 0.30/0.70 = 0.43 0.40/0.60 = 0.67 BBB with debt (wa) 0.20 0.30 0.40 7.0 7.5 8.2 0.80 0.70 0.60 The company...
blank 1 reinvestment / repatriation / revaluation blank 2 reinvestment / repatriation / revaluation Although the...
blank 1 reinvestment / repatriation /
revaluation
blank 2 reinvestment / repatriation / revaluation
Although the same basic principles of capital budgeting apply to both foreign and domestic operations, there are some key differences. First, cash flow estimation is more complex for overseas investments. Most multinational firms set up separate subsidiaries for each foreign country in which they operate. The relevant cash flows for the parent company are the dividends and royalties paid by the subsidiaries to the parent, translated...
QUESTION 1 (15 MARKS) Jeanne is attempting to evaluate two possible portfolios consisting of the same...
QUESTION 1 (15 MARKS) Jeanne is attempting to evaluate two possible portfolios consisting of the same five assets but held in different proportions. She is particularly interested in using beta to compare the risk of the portfolio and, in this regard, has gathered the following data: Portfolio Weights (%) Asset Beta Portfolio Portfolio B 1.30 0.70 1.25 1.10 0.90 20 NO 10 10 40 Total 100 100 Required: a) Calculate the betas for portfolios A and B. marks) (CL01:PLO2:01) Compare...
QUESTION 2 A company uses only debt and equity to finance its capital budget. The company...
QUESTION 2 A company uses only debt and equity to finance its capital budget. The company uses CAPM to compute the cost of equity and estimates that WACC is 12%. The capital structure of the company is 75% debt and 25% equity. The following additional information is provided: • Risk-free rate- 6%; • Return on the market 14%; • Tax rate 20%; and • Cost of Debt 12.5%. a) Compute the beta of the company?
8. A company that wants to determine its cost of equity gathers the following information: Rate of return on 3-month Tr...
8. A company that wants to determine its cost of equity gathers the following information: Rate of return on 3-month Treasury bills 3.0% Rate of return on 10-year Treasury bonds 3.5% Market risk premium 6.0% The company's equity beta 1.5 Dividend growth rate 8.0% Corporate tax rate 35% Using the capital asset pricing model (CAPM) approach, the cost of equity (%) for the company is: - %
1) The total market value of the common stock of the Okefenokee Real Estate Company is...
1) The total market value of the common stock of the Okefenokee Real Estate Company is $8.5 million, and the total value of its debt is $6.3 million. The treasurer estimates that the beta of the stock is currently 1.4 and that the expected risk premium on the market is 7%. The Treasury bill rate is 3%. Assume for simplicity that Okefenokee debt is risk-free and the company does not pay tax. What is the required return on Okefenokee stock?...
10-18 WACC and optimal capital budget Adams Corporation is considering four average-risk projects with the following...
10-18 WACC and optimal capital budget Adams Corporation is considering four average-risk projects with the following costs and rates of return: Project Cost Expected Rate of Return 1 $2,000 50% 2 3,000 40 3 5,000 30 4. 2,000 20 The company estimates that it can issue debt at a before-tax-cost of rd=5%, and its tax rate is 30 percent. The company also can issue preferred stock a $100 per share, which pays a constant dividend of $5 per year. The...
Question 2 (5 points) Athletics is trying to determine its optimal capital structure. The company's capital ructure consists of debt and common stock. In order to estimate the cost of debt, the company has produced the following table: Percent financed P ercent financed Debt-to-equity ratio Bond Before-tax cost with equity (We) of debt rating (D/S) 0.20/0.80 = 0.25 AA 0.30/0.70 = 0.43 0.40/0.60 = 0.67 BBB with debt (wa) 0.20 0.30 0.40 7.0 7.5 8.2 0.80 0.70 0.60 The company...
blank 1 reinvestment / repatriation /
revaluation
blank 2 reinvestment / repatriation / revaluation
Although the same basic principles of capital budgeting apply to both foreign and domestic operations, there are some key differences. First, cash flow estimation is more complex for overseas investments. Most multinational firms set up separate subsidiaries for each foreign country in which they operate. The relevant cash flows for the parent company are the dividends and royalties paid by the subsidiaries to the parent, translated...
QUESTION 1 (15 MARKS) Jeanne is attempting to evaluate two possible portfolios consisting of the same five assets but held in different proportions. She is particularly interested in using beta to compare the risk of the portfolio and, in this regard, has gathered the following data: Portfolio Weights (%) Asset Beta Portfolio Portfolio B 1.30 0.70 1.25 1.10 0.90 20 NO 10 10 40 Total 100 100 Required: a) Calculate the betas for portfolios A and B. marks) (CL01:PLO2:01) Compare...
QUESTION 2 A company uses only debt and equity to finance its capital budget. The company uses CAPM to compute the cost of equity and estimates that WACC is 12%. The capital structure of the company is 75% debt and 25% equity. The following additional information is provided: • Risk-free rate- 6%; • Return on the market 14%; • Tax rate 20%; and • Cost of Debt 12.5%. a) Compute the beta of the company?
8. A company that wants to determine its cost of equity gathers the following information: Rate of return on 3-month Treasury bills 3.0% Rate of return on 10-year Treasury bonds 3.5% Market risk premium 6.0% The company's equity beta 1.5 Dividend growth rate 8.0% Corporate tax rate 35% Using the capital asset pricing model (CAPM) approach, the cost of equity (%) for the company is: - %
10-18 WACC and optimal capital budget Adams Corporation is considering four average-risk projects with the following costs and rates of return: Project Cost Expected Rate of Return 1 $2,000 50% 2 3,000 40 3 5,000 30 4. 2,000 20 The company estimates that it can issue debt at a before-tax-cost of rd=5%, and its tax rate is 30 percent. The company also can issue preferred stock a $100 per share, which pays a constant dividend of $5 per year. The...
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