User Account

All Pages

Calculate the cost of equity for banana

Assignment Help Business Management
Reference no: EM132742169

Except for their capital structure, Banana Company and Pear Company are identical firms in all respect. Banana is wholly equity financed with $740,000 in stock. Pear uses both stock and perpetual debt; its stock is worth $370,000 and its debt is worth $370,000. The interest rate on its debt is 6.8 percent. Both firms expect earnings before interest and tax (EBIT) to be $102,000. Ignore taxes.

(i) Calculate the cost of equity for Banana and for Pear respectively.

(ii) Estimate the weighted average cost of capital (WACC) for Banana and for Pear. What capital structure principle does the results indicate?

(iii) Suppose Samuel owns $45,000 worth of Pear's stock. Calculate his expected rate of return.

(iv) Explain how Samuel could generate exactly the same cash flows and rate of return by investing in Banana and using homemade leverage.

Reference no: EM132742169

Questions Cloud

When is the cost of goods sold recorded : In a periodic inventory system when is the cost of goods sold recorded? Every time an item is sold to a customer. / Only after physical inventory count is done.
What is the overall tax rate on bals income : Amanda would like to organize BAL as either an LLC (taxed as a sole proprietorship) or a C corporation. In either form, the entity is expected to generate.
Prepare a performance report that compares static budget : Prepare a performance report that compares static budget and actual costs for the period just ended (i.e., the report that Kellerman likely used)
Identify the more popular types of bonds : Identify the more popular types of bonds and elaborate where necessary.
Calculate the cost of equity for banana : Except for their capital structure, Banana Company and Pear Company are identical firms in all respect. Banana is wholly equity financed with $740,000 in stock
At what price will the shares be sold to the public : The company expects they will incur $1,850,000 in legal and administrative fees to raise these funds. At what price will the shares be sold to the public
Discuss the meaning of fraud risks and the conditions : Professional auditing standards require auditors to consider "Fraud Risks". There are three key conditions that are typically present when a financial fraud.
Compute the number of each model of television : Compute the number of each model of television that the company would need to sell in order to break even under this product mix.
Why someone in the company would want to take kind of action : Arthur Chen, a newly minted CPA, was on his second audit job in the Midwest with a new client called Parson Farm Products, Inc. He was looking through the last.

Reviews

Write a Review

Business Management Questions & Answers

  Strengths and drawbacks of offering the paid-time-off

What would be the strengths and drawbacks of offering the paid-time-off benefits that you recommend?

  Leadership at mcdonalds corporationmcdonalds corporation is

leadership at mcdonalds corporationmcdonalds corporation is one of the best known global brands. starting with 2004

  Small business to organize-structure itself

What are the different ways that a business can organize/structure itself and What is the "best" way for a small business to organize/structure itself?

  Explain behaviours that are adopted in managing power

Discuss 4 Strategies and behaviours that are adopted in Managing Power.

  Who are the winners and losers

Who are the winners and losers of this policy (be sure to mention everyone who experiences a loss or benefit). Do more people see movies?

  Ownership and nurture the firms reputation

What steps can a firm take to make their reputation "private property" and encourage employees to take ownership and nurture the firms reputation?

  Discuss the income and substitution effects of a rise

Using a labor/leisure model to show and discuss the income and substitution effects of a rise in wage rate when substitution effect is greater than the income effect. Using this model to analyze implications of employee disability programs How wou..

  Implications of the trend toward hiring more contingent work

Share one new insight that you have had about U.S. Employment Laws and Regulations from this material. In addition, respond to this question and the ensuing discussion: What are the implications of the trend toward hiring more contingent workers?

  Analyse the impact of organisational objectives

A/503/5350-Personal Leadership and Management Development-ATHE Level 7 Qualifications in Management-Analyse the impact of organisational objectives.

  Discuss the key dynamics of leader

As a Global leader, discuss the key dynamics of leader and follower relationships and the influences surrounding diverse cultures.

  Explaining problem identification and formulation

The most challenging aspect of the decision making process and the most important is problem identification and formulation. What is your opinion?

  Develop a formal process to select suppliers and vendors

To strengthen your memo, investigate other companies. Provide an example of a company and its criteria and explain how it relates to your recommendations

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!

Submit Assignment

Academics

Major Subjects

Majors

Get In Touch

whatsapp: +1-415-670-9521

Phone: +1-415-670-9521

Email: [email protected]

TERMS & POLICIES

HELP & SUPPORT

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