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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 and at the time of the analysis the risk-free rate is 7%, the market risk premium is 4%, 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 1.15. 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 %
What are the problems with the IRR as a method for determining whether a project is viable? Note you need to address all the reasons that the IRR might have a problem in the capital budgeting process.
1. under what conditions will one observe floating exchange rates operating in the gold standard system2. many
You have $110,000 to invest in a portfolio containing Stock X and Stock Y. Your goal is to create a portfolio that has an expected return of 15 percent. Stock X has an expected return of 13.2 percent and a beta of 1.16, and Stock Y has an expected re..
With your understanding of the commercial lending processes, discuss your comfort level in participating in the financing efforts of a new business. Explain the lending processes in order from most comfortable to least. As an entrepreneur, would you ..
Suppose there is a firm that has several divisions. One of the divisions is considering introducing a new product to the market. If it does not introduce the product, then the firm’s profitability will not change. Assume that market research, correct..
BOND VALUATION An investor has two bonds in his portfolio that have a face value of $1,000 and pay an 11% annual coupon. Bond L matures in 12 years, while Bond S matures in 1 year. Why does the longer-term bond’s price vary more than the price of the..
Eli has made an arrangement with her financial advisor to invest $3,600 a year in an equity mutual fund. The Financial adviser determines Eli should earn a minimum of 10% on the investment. If Eli follows this plan, how much will she have in 3 years?
Lewis Industries looking at a project that will require a dollar 100,000 investments in fixed assets and another dollar 15,000 in net working capital, which will be recovered at the end of the project. The project is expected to produce sales of doll..
How long should you delay payment given the terms of your current suppliers? Prove your answer by relating the annualized cost of the discount to your investment or borrowing rate.
You must evaluate a proposed spectrometer for the R&D department. The base price is $230,000, and it would cost another $46,000 to modify the equipment for special use by the firm. What is the initial investment outlay for the spectrometer, that is, ..
Choose two decision-making tools you learned in our materials this week and explain how you would use them to make a decision with an actual problem you have faced in your professional life.
The Omega Venture Group needs to borrow to Finance a project. Repayment of the loan involves payments of $5660 at the end of every six months for six years. No payments are to be made during the development period of two years. Interest is 9% compoun..
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