What is the cost of capital used to evaluate this expansion

Assignment Help Financial Management
Reference no: EM131554719

A company has a $500 book value and a $600 market value. Its book value D/E ratio is 1.0 and its market value D/E ratio is 0.75. Its book value cost of debt is10% and its book value cost of equity is 22%. The market cost of debt is 12% and the market cost of equity is 28%. It is considering a $100 million expansion. It can borrow at the current cost of debt without increasing its cost of equity, but if it funds the expansion using a D/E ratio higher than its market value D/E ratio, the cost of equity will increase to 30%. Its tax rate is 40%. What is the cost of capital used to evaluate this expansion if it funds it at the market value D/E ratio?

Reference no: EM131554719

Questions Cloud

How much can you withdraw each month from your account : How much can you withdraw each month from your account assuming a 30-year withdrawal period?
Calculate the monthly mortgage payment of both loans : Calculate the monthly mortgage payment of both loans and identify which is the better loan.
Company is evaluating two different projects : A company is evaluating two different projects, both of which cost $25 million and last 6 years. What is the NPV for each project?
Company market value debt to equity ratio : The company’s tax rate is 35%. 21. Calculate the company’s market value debt to equity ratio.
What is the cost of capital used to evaluate this expansion : What is the cost of capital used to evaluate this expansion if it funds it at the market value D/E ratio?
What is the maximum savings available to both : If a swap is arranged, what is the maximum savings available to both? Outline a swap such that savings are divided equally between the two.
Consider american-style call options on bond : Consider American-style call options on a bond. The options expire in 60 days. The bond is currently at $1.05 per $1 par and makes no cash payments during the l
Explain what is callable bond : Please explain the different capital budgeting techniques, Please explain what is a callable bond.
Calculate the current market yield for an outside investor : calculate the current market yield, for an outside investor, for the:

Reviews

Write a Review

Financial Management Questions & Answers

  Using triangle arbitrage

How much profit can you earn on $40, 116 using triangle arbitrage?

  What is the companys cost of equity

The Absolute Zero Co. just issued a dividend of $3.40 per share on its common stock. The company is expected to maintain a constant 7 percent growth rate in its dividends indefinitely. If the stock sells for $68 a share, what is the company’s cost of..

  Calculate after tax cost of debt for each capital structure

Calculate the after-tax cost of debt for each capital structure.- Calculate the cost of preferred stock for each capital structure.

  What is the average monthly return- current yield for bond

Average Return The past five monthly returns for K and Company are 5.65 percent, 5.53 percent, -.65 percent, 4.65 percent, and 8.65 percent. What is the average monthly return? The market price of a bond is $875. The bonds have a 4.25% coupon rate pa..

  Perpetuity product from a large financial services firm

You are evaluating a growing perpetuity product from a large financial services firm. The product promises an initial payment of $23,000 at the end of this year and subsequent payments that will thereafter grow at a rate of 0.04 annually. If you use ..

  Environmental costs of globalization have altered business

“The economic, social, and environmental costs of globalization have altered business practices.”

  The yield to call on this bond

The bond is selling for $1060. The yield to call on this bond is _________

  Calculate the cost pf common equity using gordon model

Last year black water inc paid dividends $2.58. Companys dividends are expected to grow at an annual rate of 2.88 percent, forever. The companys common stock is currently selling in the market for $98.95.The investment banker will charge floatation c..

  The normal distribution is skewed about its mean

The normal distribution is skewed about its mean. The standard deviation is a measure of variability or dispersion.

  Is intervention reduce expansionary effect of fiscal policy

If the central bank uses unsterilized intervention to defend the fixed rate, will intervention tend to reduce the expansionary effect of the fiscal policy?

  What is the value of buckeye equity-value of the debt

What is the value of Buckeye’s equity? The value of the debt?

  Determine present value of the bonds payable

Determine the present value of the bonds payable.

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd