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WACC and Optimal Capital Structure F. Pierce Products Inc. is considering changing its capital structure. F. Pierce currently has no debt and no preferred stock, but would like to add some debt to take advantage of low interest rates and the tax shield. Its investment banker has indicated that the pre-tax cost of debt under various possible capital structures would be as follows: Market Debt- to-Value Ratio (wd) Market Equity-to-Value Ratio (ws) Market Debt- to-Equity Ratio (D/S) Before-Tax Cost of Debt (rd) 0.0 1.0 0.00 7.0% 0.2 0.8 0.25 8.0 0.4 0.6 0.67 10.0 0.6 0.4 1.50 12.0 0.8 0.2 4.00 15.0 F. Pierce uses the CAPM to estimate its cost of common equity, rs. The company estimates that the risk-free rate is 6%, the market risk premium is 5%, and the company's tax rate is 30%. F. Pierce estimates that its beta now (which is "unlevered" since it currently has no debt) is 0.75. Based on this information, what is the firm's optimal capital structure, and what would the weighted average cost of capital be at the optimal capital structure? Do not round intermediate calculations. Round your answers to two decimal places. DEBT % EQUITY % WACC %
A firm can purchase new equipment for 16000.00 initial investment. The equipment generates an annual after tax cash inflow of 7000.00 for 4 years. Assuming that the firm has a cost of capital of 14%. The maximum required rate of return the firm can ..
FastTrack Bikes, Inc. is thinking of developing a new composite road bike. Development will take six years and the costs are $296,638 per year. Once in production, the bike is expected to make $202,100 per year for 10 years. Calculate the NPV of this..
A7X Corp. just paid a dividend of $1.60 per share. The dividends are expected to grow at 19 percent for the next eight years and then level off to a growth rate of 5 percent indefinitely. If the required return is 14 percent, what is the price of the..
Bond J is a 6.2 percent coupon bond. Bond K is a 10.2 percent coupon bond. Both bonds have 20 years to maturity and have a YTM of 6.9 percent. a. If interest rates suddenly rise by 1 percent, what is the percentage price change of these bonds?
International business activities are inherently more attractive to large companies in mature markets than to small high growth US companies. True or false. Why or why not. Discuss the method of determining the “fair value” for forward, futures and o..
Five years ago you borrowed 200,000 to finance the purchase of a 240,000 home. The interest rate on this (old) mortgage is 10% MEY, and the level payments were made monthly to amortize the loan over 30 years (you did not curtail the loan in any way, ..
Dilwater Furniture purchased a corner lot in Pittsburg five years ago at a cost of $890,000. The lot was recently appraised at $1,070,000. At the time of the purchase, the company spent $80,000 to grade the lot and another $120,000 to pave the lot fo..
Shares of SoHot Donuts common stock are currently selling for $15. Next year’s dividend is expected to be $1.50 per share and the market rate of return is 10%. At what rate is the dividend projected to be growing?
Bradford Manufacturing Company has a beta of 1, while Farley Industries has a beta of 0.85. The required return on an index fund that holds the entire stock market is 9.5%. The risk-free rate of interest is 4.5%. By how much does Bradford's required ..
Thomson Engineering is issuing new 10-year bonds that have 20 warrants attached. If not for the attached warrants, the bonds would carry a 9% interest rate. However, with the warrants attached the bonds will pay a 7% annual coupon and still sell for ..
Consider the following capital market: a risk-free asset yielding 0.75% per year and a mutual fund consisting of 70% stocks and 30% bonds. The expected return on stocks is 10.75% per year and the expected return on bonds is 3.25% per year. The standa..
Explain concept of financial intermediation. How does the possibility of financial intermediation increase the efficiency of the financial systems?
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