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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. The company estimates that the risk-free rate is 6%, the market risk premium is 5%, 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 0.75. 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.
If the CAPM is used to estimate the cost of equity capital, the expected excess market return is equal to
You are negotiating to make a 7-year loan of $27,500 to Breck Inc. To repay you, Breck will pay $2,500 at the end of Year 1, $5,000 at the end of Year 2, and $7,500 at the end of Year 3, plus a fixed but currently unspecified cash flow, X, at the end..
A company has $7.30 per unit variable costs and $5 per unit fixed costs at a volume of 50,000 units. If the company marks up total costs by 0.51, what price should be charged if 70,000 units are expected to be sold?
a 16 debenture of r5 000 is redeemable at a premium of 10 after 5 years. the fair rate of return on similar debentures
Grunewald Industries sells on terms of 3/10, net 50. Gross sales last year were $4,972,000, and accounts receivable averaged $488,000. Half of Grunewald's customers paid on the 10th day and took discounts. What are the nominal and effective costs of ..
Bola has accumulated $50,000 in her thrift savings plan at her job at the Federal Aviation Administration. The government puts in 1% of her pay and matches up to another 4% if she puts in 5% out of her pay. Bola earns $90,000 a year and plans to add ..
What major factors should the company be aware of as it evaluates possible investment projects in the future? Would you be interested in investing in this company? Why or why not? Are there additional factors that aren't a part of this case that you..
Assume the total cost of a college education will be $200,000 when your child enters college in 16 years. You presently have $73,000 to invest. What annual rate of interest must you earn on your investment to cover the cost of your child's college ed..
A Treasury bond with a maturity of 25 years has an ask price quoted at 139:31. The coupon rate is 4.9 percent, paid semi-annually. What is the yield to maturity of this bond? (Do not round intermediate calculations. Round your answer to 2 decimal pla..
Martell Mining Company's ore reserves are being depleted, so its sales are falling. Also, because its pit is getting deeper each year, its costs are rising. As a result, the company's earnings and dividends are declining at the constant rate of 8% pe..
What business concept would be appropriate for a sole proprietorship, a corporation, and a limited liability company, respectively? If you were opening your dream business, what structure would you select? Why?
Companies U and L are identical in every respect except that U is unlevered while L has $10 million of 5.9% bonds outstanding. Assume that (1) all of the MM assumptions are met, (2) there are no corporate or personal taxes, (3) EBIT is $2.1 million, ..
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