Solution-What would the return on equity be if the equity

What would the return on equity be if the equity option

Assignment Help Finance Basics

Reference no: EM132622540

Caracal Ltd. is comparing different capital structures. The management of the company needs to compare the WACC of the different financing options at its disposal. Specifically, there is a need to compare the WACC's of the two options it is considering. The first option, is to borrow funds while the second option is to raise equity. The company has a target D/E ratio of 0.45 which it intends to revert to as soon as possible, while its current D/E ratio is 0.50. Currently, the company has a beta of 1.5. The tax rate is 28%, the risk free rate 7% and the market risk premium, 6%. A very similar company recently issued bonds with a YTM of 10%. The company has R15 000 in total assets, R5000 in total liabilities with a book cost of 5% and has R10 000 in equity. The company currently has EBIT of R1000 which it expects to stay the same for the foreseeable future. R5000 will be raised, either by debt or equity. If debt is raised, the company expects to issue bonds at a market related YTM with a coupon rate of 10%.

Question: If the company chose to use debt financing, what would it's WACC be?

Question: What would its WACC under the equity option be?

Question: What would the return on debt be if the debt option was chosen?

Question: What would the return on equity be if the equity option was chosen?

Reference no: EM132622540

Questions Cloud

What is the value to cbrl : In the 2017 fiscal year ending July 28, Cracker Barrel's (CBRL's) free cash flow was $185.1 million. The CFO of CBRL, Jill Golder, told MBA students that CBRL's

What are the criteria that you might use in evaluating : What are the criteria that you might use in evaluating these projects?Which capital budgeting method seems best choice for you? why?

Describe the vulnerable population and setting : Describe the vulnerable population and setting. What are the risk factors that make this a vulnerable population? Use evidence to support the risk factors you.

Calculate the annual depreciation for the Equipment : XYZ Company purchased an equipment on July 1, 2015 for $42,000. Calculate the annual depreciation for the Equipment

What would the return on equity be if the equity option : Caracal Ltd. is comparing different capital structures. The management of the company needs to compare the WACC of the different financing options at its dispos

Discussing about marriage equality : Discussing about marriage equality. Marriage is a traditional union only between a woman and a man.

What is the different between an LLC and a S Corporation : What IRS form does a partner in a partnership receive with his share of income? What is the different between an LLC and a S Corporation

What is one element of cybersecurity : What is one element of cybersecurity that can be implemented in accounting software. How does that security feature protect companies' data and information?

Which machine should be chosen : If the company plans to replace the machine when it wears out on a perpetual basis, which machine should be chosen

User Account

All Pages

What would the return on equity be if the equity option

Reference no: EM132622540

Reference no: EM132622540

Questions Cloud

Reviews

Write a Review

Finance Basics Questions & Answers

Financial reporting and analysis

A report on financial accounting

Describe the types of financial ratios

Differences between sole proprietorship and corporation

Prepare a cash budget statement

What are the implied interest rates

State pricing theory and no-arbitrage pricing theory

Small business administration

Effect of financial leverage

Evaluate the basis for the payment to the lender

Importance of opps, ipps, mpfs and dmepos

Time value of money

Assured A++ Grade

Academics

Major Subjects

Majors

Get In Touch

TERMS & POLICIES

HELP & SUPPORT