Compute the cost of equity and the wacc

Reference no: EM13211535

Modigliani-Miller world: there are (i) no taxes, (ii) no bankruptcy costs, (iii) no conflicts of interest between bondholders, shareholders and managers, and (iv) firms know their future financing needs. You are looking at a firm with operating cash flows that have a beta of 1.2. The market risk premium is 6% and the risk free rate is 3%. The firm is currently all equity financed but it can borrow as much as it wants at 3%, i.e., for simplicity we assume that the debt is risk free -- there is no bankruptcy risk.

(a) Compute the cost of equity and the WACC for the firm as is (all equity).

(b) Compute the cost of equity and the WACC for the firm, assuming it recapitalizes such that debt becomes 10% of the capital structure.

(c) Repeat part (b) for debt ratios of 20%, 30%, ..., 90%. How does the WACC change as leverage changes? Can you explain the pattern using the concepts we have discussed in class?

(d) Now assume that the firm faces a tax rate of 38%. Compute the cost of equity and the cost of capital for debt ratios 0%, 10%, ..., 90%. How does the WACC change as leverage changes? Can you explain the pattern using the concepts we have discussed in class

Reference no: EM13211535

Questions Cloud

Explain what is the vapor pressure of sicl4 : What is the vapor pressure of SiCl4 (in mm Hg) at 23.5 C? The vapor pressure of SiCl4 is 100 mm Hg at 5.4 C and Delta H vap

Explain daily intake of sodium : The energy bar contains 100 mg of sodium, which constitutes 4% of the maximum recommended daily intake of sodium.

Compute the mass of gasoline : Calculate the mass of gasoline (in kg) needed to fill up a small tank which has a capacity of 3.0 L. Assume that the density of gasoline is 0.80 g/mL

Advantages of the international trade agreement : Summarized the advantages of the international trade agreement selected and summarized the disadvantages of the international trade agreement selected.

Compute the cost of equity and the wacc : Compute the cost of equity and the WACC for the firm as is all equity and compute the cost of equity and the WACC for the firm, assuming it recapitalizes such that debt becomes 10% of the capital structure.

Depict the structure of the organic hald : The high-field:low-field integration ration is 2:1. Deduce the structure of the organic hald and explain the NMR signals. I'm thinking it's 1,1-dichloropropane.

Compute the number of moles in the sample : container at a temperature of 47C exerts a pressure of 6.3 atm. Calculate the number of moles in the sample

Explain what is its final temperature : sample of hydrogen gas initially at 29C and 7.0 L iscooled until its final volume is 2.9 L. What is its final temperature

Depict constitutional isomers of c5h8 : Draw constitutional isomers of C5H8 that are terminal and internal. Name each molecule according to IUPAC.

User Account

All Pages