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What is the break-even rate for refinancing

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Problem: Dorado Inc. is a Canadian company that produces and retails men's formal suits. The company currently has 800 bonds outstanding which pay annual coupons. The bonds are trading at 74% of par, have a 9% coupon and 20 years to maturity. There are 50,000 common shares outstanding with a book value of $25 per share. T-bills are currently yielding 4%, and the return on the market is 11%. Dorado's common stock just paid a $2 dividend that is expected to grow at 2% annually. Common shares are currently selling at $14.58. Dorado's tax rate is 30%.

Required:

Question 1: What is Dorado Inc.'s weighted average cost of capital?

Question 2: What is your best estimate of Dorado Inc.'s beta?

Question 3: Dorado is considering an expansion into Europe. From comparison to firms already operating in Europe, Dorado calculates that the hurdle rate for this project is 14%. Compare this WACC calculated with that calculated above. Which one is higher? Does this make sense? Give one reason to support your position.

Question 4: According to the efficient markets hypothesis, if the firm decides to enter the European market, what should happen to the return required by shareholders of the firm?

Reference no: EM132417253

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