Calculate the weighted average cost, Financial Accounting

The following information is available about the capital structure of Cheng & Davis Development (CDD).

Capital Structure

Current

Target

 

Book Value

Market Value

Book Value

Market Value

Debt

1000

1000

-

40%

Equity

1000

3000

-

60%

(a)    What transaction(s) in the capital market would CDD have to conduct to achieve its capital structure, without raising any net new capital?

(b)   The equity beta of CDD's stock, estimated from recent data, is 0.8. What is the asset beta? Assume for this part that the beta of debt is approximately zero.

(c)    If CDD were to change its capital structure towards its target proportions, how would this affect the equity beta of the company? Assume for this part that the beta of debt is approximately zero.

Consider the following information about market interest rates and taxes:

1-year risk free rate

2%

30-year risk free rate

4.5%

Market risk premium

6.5%

Corporate tax rate (including state taxes)

40%

Yield on long-term CDD bonds

6%

(d)   Calculate the weighted average cost of capital (WACC) that you would use to value CDD as a stand-alone company. Assume henceforth that CDD has achieved its target capital structure, without raising any net new capital.

(e)    Would you also use the cost of capital calculated under (d) to evaluate whether the management team of Karolyn Cheng and Kimberly Davis delivered value over the next year? If not, what change do you recommend? Explain your calculations.

(f)    Based on your answer under (e): if next year's EBIT is 400, what is the economic income delivered by Karolyn and Kimberly?

Posted Date: 2/28/2013 12:08:26 AM | Location : United States







Related Discussions:- Calculate the weighted average cost, Assignment Help, Ask Question on Calculate the weighted average cost, Get Answer, Expert's Help, Calculate the weighted average cost Discussions

Write discussion on Calculate the weighted average cost
Your posts are moderated
Related Questions
Trade Sources of Information Within for instance the credit card industry it isn't uncommon for information on an individual's credit rating to be shared. In a alike vein withi

RESOLUTIONS OF CREDITORS Normally, decisions at meetings of creditors are taken by ordinary resolution, viz., a resolution passed by a simple majority in value of creditors pre

The financial year of Jack and Jill Ltd will end on 31 May 2008. At 1 June 2007, the company had in use equipment with a total accumulated cost of Rs 135,620 which had been depreci

Can anyone here help me in this question ?? Kindly tell how can we solve it Mr. “A” starts a new business. Before to start the business operation, he has purchased vehicle Rs. 1,

1. discuss how VAT system works by using relevant examples. 2. list and explain the VAT supply categories; provide relevant examples of each category. 3. provide a recommendation r

On December 1, 2013, Colonel Wilder borrowed $400,000 at 12% interest and pledged $500,000 in accounts receivable as collateral. Additionally, Colonel Wilder was charged a finance

QUESTION 1: The Alpha Company Ltd was registered with Nominal Capital of 60,000 Equity shares of Rs.10 each. The following were the ledger balances on 31st March 2011.

Q. What is Permanent Negotiating Machinery? Two Federation of Union All Indian Railway men's federation (AIRF) & National Federation of Indian Railway (NFIR) men have been reco

assignment ofr p V RATIO ANALYSIS

Real Estate Mortgage Investment Conduit (REMIC) - An entity which holds a fixed pool of mortgages and issues multiple classes of interest in itself to investors. A qualified REMIC