Homework Answers
12
Optimal structure is one where the WACC maximizes stock price, therefore c is correct
13
Current D/E = 0.55/0.45=1.222
| Levered Beta = Unlevered Beta x (1 + ((1 – Tax Rate) x (Debt/Equity))) |
| 1.25 = Unlevered Beta*(1+((1-0.35)*(1.222))) |
| Unlevered Beta = 0.7 |
New D/E = 75/25= 3
| Levered Beta = Unlevered Beta x (1 + ((1 – Tax Rate) x (Debt/Equity))) |
| levered beta = 0.7*(1+((1-0.35)*(3))) |
| levered beta = 2.05 |
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Il 12. Based on the information below, what is the firm's optimal capital structure? A. Debt 40%; Equity 60%; EPs-$2.95; Stock price = S26.50. B. Debt-30%; Equity : 50%; EPS-S3.05: Stock prices S...
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The target capital structure
for Acme is 60% debt and 40% equity. The risk-free rate is 2%. The
market risk premium is 5%. The beta of Acme against a relevant
stock index is 0.8. The pre-tax cost of debt for Acme is 4%. Assume
an effective corporation tax of 17%.
Question 1
(a) Based on the given financial statements, calculate the
following ratios for 2018. Explain the consequence if a calculated
ratio is significantly lower than its corresponding industry
average....
Simply Cayenne Company: A Comprehensive Case In Measuring A Firm's Cost Of Capital (Boudreaux, D., S. Rao, and P. Das, 2014) THE CASE Patricia Hotard, the Chief Executive Officer of Simply Cayenne Refining and Processing Company (SCRPC), picked up the telephone to call Jimmy Breez, the firm's financial manager. Breez had sent her an email earlier that morning suggesting that the capital budgeting committee should get together prior to the scheduled Investment Decision Committee meeting that is in one week...
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