5Gaucho Services starts life with all-equity financing and a cost of equity of 13%. Suppose it refinances to the followingmarket-value capital structure:10pointseBookDebt (D)Equity (E)41%59%at D = 10.4%a. Use MM's proposition 2 to calculate the new cost of equity. Gaucho pays taxes at a marginal rate of T = 35%.b. Calculate Gaucho's after-tax weighted-average cost of capital.Note: Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.Printa. Return on equityReferencesb. After-tax WACC%%

Part 2: Explanation:Step 1: Calculate the new cost of equity using MM's Proposition 2.MM's…

Answered: 5 Gaucho Services starts life with…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Gaucho Services starts life with all-equity financing and a cost of equity of 14%. Suppose it refinances to the following market-value capital structure:Debt (D) 45% at rD = 9.5%Equity (E) 55%Use MM’s proposition 2 to calculate the new cost of equity. Gaucho pays taxes at a marginal rate of T c = 40%. Calculate Gaucho’s after-tax weighted-average cost of capital.
Archimedes Levers is financed by a mixture of debt and equity. You have the followinginformation about its cost of capital:rE =__, rD = 12%, rA = __,Beta(E) = 1.5, Beta(D) =__, Beta(A) = __,rf = 10%, rm = 18%, D/V = .5Can you fill in the blanks?
Gaucho Services starts life with all-equity financing and a cost of equity of 15%. Suppose it refinances to the following market-value capital structure: Debt (D) 46% at rD = 9.6% Equity (E) 54% Use MM’s proposition 2 to calculate the new cost of equity. Gaucho pays taxes at a marginal rate of Tc = 35%. Calculate Gaucho’s after-tax weighted-average cost of capital.
Archimedes Levers is financed by a mixture of debt and equity. You have the followinginformation about its cost of capital:rE =__, rD = 12%, rA = __,Beta(E) = 1.5, Beta(D) =__, Beta(A) = __,rf = 10%, rm = 18%, D/V = .5Can you fill in the blanks? Suppose now that Archimedes repurchases debt and issuesequity so that D / V = .3. The reduced borrowing causes r D to fall to 11%. How do theother variables change?
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Aneka Inc. hire your consulting firm to help them estimate the cost of equity. Yield of Aneka Inc. bonds is 7.25%, and the economist company in your company believes that the cost equity can be estimated using a risk premium of 3.50% over the company's cost of debt. What is Lange's estimated cost of equity from retained earnings? a. 10.75% b. 11.18% c. 11.63% d. 12.09% e. 12.58%
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The cost of equity using the CAPM approach The current risk-free rate of return (rRF) is 3.86%, while the market risk premium is 6.63%. the Monroe Company has a beta of 0.92. Using the Capital Asset Pricing Model (CAPM) approach, Monroe's cost of equity is
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