Reference no: EM132740222
Ricon Raquets is considering taking on additional debt to fuel its growth. But before that decision is made, the chief financial officer wants the latest estimate of the company's cost of capital and asks you to calculate it. You know the following information about Ricon's securities and the market:
Bonds Common Stock
3000 bonds outstanding 200,000 shares outstanding
$1000 par value Expected dividend in 2020 = $3.24
8.5% coupon rate Market price = $36
7 years to maturity
Market price = $1047
Ricon's marginal tax rate = 30% risk-free rate = 4%
Ricon's expected growth rate = 3% average market return = 9%
Ricon's beta = 1.4
a. Estimate Ricon's component cost of debt.
b. Estimate Ricon's component cost of equity using as many methods as possible. Which estimate you will use?
c. Estimate Ricon's weighted average cost of capital.
The amount of additional debt Ricon is considering would change its capital structure to a mix of 60% debt and 40% equity.
d. Estimate what Ricon's cost of capital would be after the new debt is issued assuming that the component costs of debt and equity found in (b) and (c) stay the same.
e. Explain why it is highly unlikely that the component costs of debt and equity would stay the same if new debt is issued and the capital structure mix changes.
f. The CFO asks for your general thoughts about taking on more debt. Aside from the cost of capital calculation, what other qualitative factors do you think Ricon must consider in making its decision?
|
Compute for the month purchase-price variance for aluminum
: Compute for the month the purchase-price variance for aluminum. Indicate whether this variance is favorable (F) or unfavorable (U).
|
|
Yielded additional valuable information
: What approaches could have yielded additional valuable information?
|
|
Prepare a single-step income statement
: Interest expense, $25,000; rent revenue, $60,000; sales, $9,332,500; and selling expenses, $1,250,000. Prepare a single-step income statement
|
|
What is an roi ratio
: What is an ROI ratio? What are its advantages and disadvantages?
|
|
Estimate ricon component cost of debt
: Ricon Raquets is considering taking on additional debt to fuel its growth. But before that decision is made, the chief financial officer wants
|
|
The midas case study
: Discuss whether or not operating practices should be changed to accommodate the tune-ups. Be sure to explain your reasoning.
|
|
What should wardlaw management do
: What should Wardlaw's management do? How should Wardlaw price the new project? How do you expect the customer will respond?
|
|
Is estimated returns inventory an asset
: For the fiscal year, sales were $46,680,000 and the cost of goods sold was $28,000,000. Is Estimated Returns Inventory an asset, liability
|
|
Hedging the foreign exchange rate risk
: What do you understand from hedging the foreign exchange rate risk and why is it important for firms to do so?
|