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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. DEBT % EQUITY % WACC %
Obsolete Computer Systems, Inc. wants to reemerge as a major producer of computer software. The company has two options: Either it can purchase Upstart Software for $25m now whose products are expected to survive 5 years.
Fiske Roofing Supplies' stock has a beta of 1.23, its required return is 10.25%, and the risk-free rate is 4.30%. What is the required rate of return on the market? (Hint: First find the market risk premium.)
John Vincent invested 10,000 in a savings account. The account pays 4.5% annual interest. john will have how much in the account at the end of 10 years? Round to the nearest dollar
Thornley Machines is considering a 3-year project with an initial cost of $1,080,000. The project will not directly produce any sales but will reduce operating costs by $640,000 a year. The equipment is depreciated straight-line to a zero book value ..
Bond J has a coupon rate of 5 percent and Bond K has a coupon rate of 11 percent. Both bonds have 19 years to maturity, make semiannual payments, and have a YTM of 8 percent. If interest rates suddenly rise by 2 percent, what is the percentage price ..
Fama’s Llamas has a weighted average cost of capital of 10.8 percent. The company’s cost of equity is 13 percent, and its pretax cost of debt is 8.8 percent. The tax rate is 38 percent. What is the company’s target debt−equity ratio?
A Treasury bill with 113 days to maturity is quoted at 98.630. What is the bank discount yield, the bond equivalent yield, and the effective annual return?
Your company Portfolio Manager is convening a review board in the first calendar quarter to consider three projects. You have been asked to provide recommendations with respect to the capital budgeting aspects of these projects. Your recommendations ..
Your firm is considering a new product development. an outlay of $90,000 is required for equipment, and an additional net working capital of $5000 is required. the project is expected to have a 4 year life, and the equipment will be depreciated on a ..
LLT Company’s stock is currently selling for $105 per share. LLT just paid its annual dividend, so the next one won’t be paid until one year from today. If you required an annual rate of return of 15% on an investment in LLT’s common stock, what amou..
For bond valuation, if the bond is currently trading at a discount, then the
Given the following information; Risk free rate = 3%, Volatility = beta= 5.6,
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