) Salvatore Inc. is a motion picture production company. At the end of its most recent financial year, the firm had $ 500 million in interest bearing debt on its books (with interest payments of $ 35 million a year and an average maturity of 8 years). The firm has a rating of B + and a pre-tax cost of debt of 8%. There are 50 million shares trading at $ 6 per share and the levered beta for the firm is 2.25. The tax rate is 40%, the risk free rate is 4% and the market risk premium is 4.82%. a. Estimate the current cost of capital for the firm. b. Assume now that Salvatore Inc. is able to issue enough stock to retire half of its outstanding debt (in market value terms). If the stock price does not change after this transaction, estimate the pre-tax cost of debt after the transaction.

) Salvatore Inc. is a motion picture production company. At the end of its most recent financial year, the firm had $ 500 million in interest bearing debt on its books (with interest payments of $ 35 million a year and an average maturity of 8 years). The firm has a rating of B + and a pre-tax cost of debt of 8%. There are 50 million shares trading at $ 6 per share and the levered beta for the firm is 2.25. The tax rate is 40%, the risk free rate is 4% and the market risk premium is 4.82%. a. Estimate the current cost of capital for the firm. b. Assume now that Salvatore Inc. is able to issue enough stock to retire half of its outstanding debt (in market value terms). If the stock price does not change after this transaction, estimate the pre-tax cost of debt after the transaction.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Ma, Inc. has a market value capital structure of 30% debt and 70% equity. The tax rate is 30%. Thefirm’s bonds currently trade in the market for $1035.00. These bonds have a face value of $1,000,coupon rate of 8% paid semiannually, and 10 years remaining to maturity. The firm’s common stocktrades for $20 per share. The firm has just paid a dividend of $2. Future dividends are expected to growat 2% per year. Based on this information, Ma, Inc.’s WACC is _____%. Cream and Crimson has a capital structure of 60% debt and 40% equity. The tax rate is 34%. The firm’sbonds currently trade in the market for $784. These face value $1,000 bonds have a coupon rate of 8%,paid semiannually, with 7 years to maturity. The firm’s common stock trades for $15 per share and thecompany’s beta is 1.28. The risk-free rate (Rf) = 3.2% and the market risk premium (Rm – Rf) = 8.1%.Given this information, Cream and Crimson’s WACC is _____%.
An analyst has collected the following information regarding Christopher Co.: · The company's capital structure is 70 percent equity, 30 percent debt. · The yield to maturity on the company's bonds is 5 percent. · The company's year-end dividend (D1) is forecasted to be $0.8 a share. · The company expects that its dividend will grow at a constant rate of 5 percent a year. · The company's stock price is $25. · The company's tax rate is 40 percent. · The company anticipates that it will need to raise new common stock this year. Its investment bankers anticipate that the total flotation cost will equal 10 percent of the amount issued. Assume the company accounts for flotation costs by adjusting the cost of capital. Given this information, calculate the company's cost of new equity. Round it to two decimal places.
Hoover Enterprises stock trades for $52.50 per share. It is expected to pay a $2.50 dividend at year end (D1= $2.50), and the dividend is expected to grow at a constant rate of 5.50% a year. The before-tax cost of debt is 7.50%, and the tax rate is 40%. The target capital structure consists of 45% debt and 55% common equity. What is the company's WACC if all the equity used is from reinvested earnings? Show work in excel.
Q. Malik Brothers has a stock price of $45. In the fiscal year just ended, dividends were $2.00. Earnings per share and dividends are expected to increase at an annual rate of 9 percent. The risk-free rate is 5 percent, the market risk premium is 6.4 percent and the beta on Malik’s stock is 1.25. Malik’s target capital structure is 40% debt and 60% common equity. Malik’s tax rate is 40 percent. New common stock can be sold to net $35 per share after flotation costs. Delta can sell bonds that mature in 25 years with a par value of $1,000 and an 8% coupon rate paid annually for $960. Calculate the required return on the firm’s stock using the discounted cash flow approach.
Q. Malik Brothers has a stock price of $45. In the fiscal year just ended, dividends were $2.00. Earnings per share and dividends are expected to increase at an annual rate of 9 percent. The risk-free rate is 5 percent, the market risk premium is 6.4 percent and the beta on Malik’s stock is 1.25. Malik’s target capital structure is 40% debt and 60% common equity. Malik’s tax rate is 40 percent. New common stock can be sold to net $35 per share after flotation costs. Delta can sell bonds that mature in 25 years with a par value of $1,000 and an 8% coupon rate paid annually for $960. Calculate the before-tax interest rate on new debt financing.
Q. Malik Brothers has a stock price of $45. In the fiscal year just ended, dividends were $2.00. Earnings per share and dividends are expected to increase at an annual rate of 9 percent. The risk-free rate is 5 percent, the market risk premium is 6.4 percent and the beta on Malik’s stock is 1.25. Malik’s target capital structure is 40% debt and 60% common equity. Malik’s tax rate is 40 percent. New common stock can be sold to net $35 per share after flotation costs. Delta can sell bonds that mature in 25 years with a par value of $1,000 and an 8% coupon rate paid annually for $960. Calculate the WACC if equity financing is from the sale of common stock.
Running Shoes, Inc. has 2 million shares of stock outstanding. The stock currently sells for $15 per share. The firm's debt is publicly traded and has five years until maturity. The current value of the firm's bonds is $14.1016 million with a yield to maturity of 8%. The risk free rate is 2% and the market risk premium is 9%. You've estimated that the firm has a beta of 1.7. The corporate tax rate is 30%. Hint: find the market value of the debt. What percentage of Running Shoes, Inc. is financed with debt? (Answer in decimal form)
Granite Works maintains a debt-equity ratio of .65 and has a tax rate of 32%. The pretax cost of debt is 9.8%. There are 25,000 shares of stock outstanding with a beta of 1.2 and a market price of $19 a share. The current market risk premium is 8.5% and the current risk-free rate is 3.6%. This year, the firm paid an annual dividend of $1.10 a share and expects to increase that amount by 2% each year. Using an average expected cost of equity, what is the WACC?
Given the following information for Watson Power Co., find the WACC. Assume the company’s tax rate is 21%. Debt: 15,000 bonds with a 5.8 percent coupon outstanding, $1,000 par value, 25 years to maturity, selling for 108 percent of par; the bonds make semiannual payments Common Stock: 575,000 shares outstanding, selling for $64 per share; the beta is 1.09. Preferred Stock: 35,000 shares of 2.8 percent preferred stock outstanding, currently selling for $65 per share. Market: 7 percent market risk premium and 3.2 percent risk-free rate. Please complete on excel and show excel formulas!
ABC Inc. is expected to pay a $2.50 dividend at year end (D1 = $2.50), the dividend is expected to grow at a constant rate of 5.50% a year, and the common stock currently sells for $67.50 a share. The before-tax cost of debt is 7.50%, and the tax rate is 40%. The company's capital structure consists of 45% common equity and 55% debt. What is the company’s WACC?
Edwards Construction currently has debt outstanding with a market value of $75,000. The company has a WACC of 10 percent. Tax rate is 20%. The company just released its EBIT of $8,750 for the preceding financial year (t = 0). What is the debt-to-value ratio if the company’s growth rate is 7 percent? Group of answer choices 0.23 0.3 0.21 0.7
The Inc. is expected to pay a $2.50 dividend at year end (so D1 = $2.50). The dividend’s growth rate = 5.50% per year. The current stock price = $52.50 per share. The before-tax cost of debt is 7.50%. The tax rate = 40%. The target capital structure is 45% debt and 55% common equity. How much is the Inc’s? 7.07% 7.36% 7.67% 7.98%

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