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LVMH currently has a debt-to-capital ratio of 10% and an average tax rate of 34%. LVMH's bonds have a 4% yield to maturity. Using the CAPM, the firm estimates that its cost of equity is 12%.
The firm is considering a new capital structure with a debt-to-capital ratio of 50%. An investment bank has estimated that the yield to maturity on the company's bonds would rise to 8%.
The risk-free rate is 2% and the expected equity market risk premium is 7%.
1. What would be the new beta if the company goes ahead with the recapitalization?
2. What would be the new cost of equity after the recapitalization?
3. What would be the new WACC after the recapitalization?
The portion of the Federal Insurance Contributions Act (FICA) tax paid by employers is 7.65 percent and the portion paid by employees is 7.65 percent (for a total of 15.3 percent). Suppose that absent FICA taxes, workers receive a competitive equilib..
Gold Mining, Inc. is using the profitability index (PI) when evaluating projects. Gold Mining’s cost of capital is 8.75 percent. What is the PI of a project if the initial costs are $2,371,020 and the project life is estimated as 9 years? The project..
Jett’s Carwash has $4 billion in debt and $2 billion in equity. The firm’s cost of debt of 3.3 percent and a cost of equity of 14.4 percent (assume that these costs do not change with the capital structure). The tax rate is 35%. What is the firm’s we..
Select a health care organization (local or national, large or small, public or private) and perform a needs assessment/gap analysis.
Harrison Clothiers' stock currently sells for $35 a share. It just paid a dividend of $1.5 a share (that is, D0 = 1.5). The dividend is expected to grow at a constant rate of 3% a year. What stock price is expected 1 year from now?
Sam, the youngest of four, will graduate in industrial engineering this June. His future plans have not solidified yet, but his parents clearly believe that he will be self-supporting. In fact, they are planning on selling their home, taking a world ..
Find the net present value for the following series of future cash flows, assuming the company's cost of capital is 6.5%. The initial outlay is $450,200.
The bank estimates its economic capital on product 1 to be $25 million and for product 2 to be $90 million. The bank's target hurdle rate is 20 percent. Which product would you recommend the bank invest in and why?
A Answer option has a zero intrinsic value; that is, for a call option, the underlying asset price is below the strike price. or for a put option, the underlying asset price is above the strike price.
Kellogg Co. (K) recently earned a profit of $2.42 earnings per share and has a P/E ratio of 19.45. The dividend has been growing at an 8 percent rate over the past few years. what would be the stock price in four years if the P/E ratio remained uncha..
The spot price of an investment asset that provides no income is $40, and the risk-free rate for all maturities (with continuous compounding) is 9%. What, to the nearest cent, is the 4-year forward price?
Increase in demand for funds as well as an increase in inflation will put upward pressure on interest rates and businesses will also reign in on capital purchases and expansion plans in order to keep their operating costs in line.
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