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
FSN Analysis: In this method inventory items are classified as per the usage/consumption pattern. They are categorizing as: Fast Moving (F) items are stored in huge quant

How do i find the retained earnings? What is the formula to find retained earnings? What is the retained earnings? Accounts payable $ 5,000 Notes payable $ 7,000 Accounts receivabl

BALANCE SHEET Grouping of items:   Items in the Balance Sheet should be grouped under appropriate headings. In particular, a trust operating the provisions of the Trustee Act

Accounting Policies These financial statements have been prepared under the historical cost basis of accounting which is modified to accommodate the revaluation of certain proper

ASSOCIATE COMPANIES (IAS 28) An associate company is a company in which the investing company owns more than 20% but less than 50% of the voting rights.  This means that the inve

Puts - A put is an option to sell a number of shares of stock at a stated price within a definite period. Gain or loss on a put is short or long term depending on holding period of

STATEMENTS OF FINANCIAL POSITION: as at 31 December 2011 Group                                 Note         2011                         2010        RM'

Illustration of maximum possible loss method A, B and C have been partners for several years, sharing profits and losses in the ratio 2:2:1. They decided to dissolve the firm o

1. Assume that the money market is initially in equilibrium for an economy. Explain with the aid of a diagram how the market adjusts to (i) an increase in money supply (ii

inventory ratio of 4 compared to 7.1