S14-15 Finding the WACC [LO3]You are given the following information for Lightning Power Company. Assume thecompany's tax rate is 21 percent.Debt:12,000 bonds with a 4.6 percent coupon outstanding, $1,000 par value,25 years to maturity, selling for 105 percent of par; the bonds makesemiannual payments.Commonstock:575,000 shares outstanding, selling for $81 per share; the beta is 1.04.Preferredstock:Market:30,000 shares of 3.4 percent preferred stock outstanding, a $100 parvalue, currently selling for $94 per share.7 percent market risk premium and 3.2 percent risk-free rate.What is the company's WACC? (Do not round intermediate calculations and enter youranswer as a percent rounded to 2 decimal places, e.g., 32.16.)WACC%

The weighted average cost of capital (WACC) calculates a company's cost of capital, proportionately…

Answered: S14-15 Finding the WACC [LO3] You are…

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter11: The Cost Of Capital

Section: Chapter Questions

Problem 1PROB

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You are given the following information for Cleen Power Co. Assume the company’s tax rate is 30 percent. Debt: 6,000 7.9 percent coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 108 percent of par; the bonds make semiannual payments. Common stock: 510,000 shares outstanding, selling for $69 per share; the beta is 1.12. Market: 10 percent market risk premium and 5.9 percent risk-free rate. What is the company's WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) WACC %
b) Country Markets has an unlevered cost of capital of 12 percent, a taxrate of 38 percent, and expected earnings before interest and taxesof $15,700. The company has $12,000 in bonds outstanding that have aISSUED BY THE CI, MGMT3048 ON JUNE 11, 2023 36 percent coupon and pay interest annually. The bonds are selling atpar value. What is the cost of equity?
Q5 Currently, Bima Industries can sell 15-year, RM1,000-par-value bonds paying annual interest at a 12% coupon rate. As a result of current interest rates, the bonds can be sold for RM1,010 each; flotation costs of RM30 per bond will be incurred in this process. The firm is in the 40% tax bracket. (a) Calculate the net proceeds from the sale of the bond. (b) (c) Prepare the cash flows from the firm's point of view over the maturity of the bond. Estimate the following using the approximation formula; (i) before-tax cost of debt. (ii) after-tax costs of debt.
RECAPITALIZATION Currently, Bloom Flowers Inc. has a capital structure consisting of 20% debt and 80% equity. Blooms debt currently has an 8% yield to maturity. The risk-free rate (rRF) is 5%, and the market risk premium (rM rRF) is 6%. Using the CAPM, Bloom estimates that its cost of equity is currently 12.5%. The company has a 40% tax rate. a. What is Blooms current WACC? b. What is the current beta on Blooms common stock? c. What would Blooms beta be if the company had no debt in its capital structure? (That is, what is Blooms unlevered beta, bU?) Blooms financial staff is considering changing its capital structure to 40% debt and 60% equity. If the company went ahead with the proposed change, the yield to maturity on the companys bonds would rise to 9 5%. The proposed change will have no effect on the companys tax rate. d. What would be the companys new cost of equity if it adopted the proposed change in capital structure? e. What would be the companys new WACC if it adopted the proposed change in capital structure? f. Based on your answer to Part e, would you advise Bloom to adopt the proposed change in capital structure? Explain.
Hasting Corporation is interested in acquiring Vandell Corporation. Vandell has 1 million shares outstanding and a target capital structure consisting of 30% debt; its beta is 1.4 (given its target capital structure). Vandell has $10.82 million in debt that trades at par and pays an 8% interest rate. Vandell’s free cash flow (FCFJ is $2 million per year and is expected to grow at a constant rate of 5% a year. Vandell pays a 40% combined federal and state tax rate. The risk-free rate of interest is 5%, and the market risk premium is 6%. Hasting’s First step is to estimate the current intrinsic value of Vandell. What are Vandell’s cost of equity and weighted average cost of capital? What is Vandell’s intrinsic value of operations? [Hint: Use the free cash flow corporate valuation model from Chapter 8.) What is the current intrinsic value of Vandell’s stock?
RECAPITALIZATION Currently, Forever flowers Inc. has a capital structure consisting of 25% debt and 75% equity. Forever's debt currently has a 7% yield to maturity. The risk-free rate (rRF) is 6%, and the market risk premium (rM - rRF) is 7%. Using the CAPM, Forever estimates that its cost of equity is currently 14.5%. The company has a 40% tax rate. a. What is Forever's current WACC? b. What is the current beta on Forever's common stock? c. What would Forever's beta be if the company had no debt in its capital structure? (That is, what is Forever's unlevered beta, bU?) Forever's financial staff is considering changing its capital structure to 40% debt and 60% equity. If the company went ahead with the proposed change, the yield to maturity on the company's bonds would rise to 10.5%. The proposed change will have no effect on the company's tax rate. d. What would be the company's new cost of equity if it adopted the proposed change in capital structure? e. What would be the company's new WACC if it adopted the proposed change in capital structure? f. Based on your answer to part e, would you advise Forever to adopt the proposed change in capital structure? Explain.
Suppose that LilyMac Photography expects EBIT to be approximately $230,000 per year for the foreseeable future, and that it has 1,000 10-year, 9 percent annual coupon bonds outstanding. What would the appropriate tax rate be for use in the calculation of the debt component of LilyMac's WACC? Tax rate 37 %
16 The Lewin Inc. has issued 60,000 bonds with an 8% coupon rate and a quoted price of 110; the bonds have 30 years to maturity; the bonds make annual payments; $1,000 par value, the corporate tax rate is 25%. What is the aftertax cost of the debt? (Note: 7%
Calculate the WACC for the following. Assume the tax rate to be 21%. Debt: 16,000 6.2% coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 108% of par; the bonds make semiannual payments Common stock: 535,000 shares outstanding, selling for $81 per share; beta is 1.2. Preferred stock: 20,000 shares of 4.2% preferred stock outstanding, currently selling for $92 per share. Par value is $100. Market: 7% market risk premium and 3.1% risk free rate
Given the following information of Electric Transport Debt value: $75,000. Debt information: 8.4 percent coupon bonds outstanding. $1,000 par value, 22 years to maturity, selling for $1,030, the bonds make annual payments Equity value: $175,000. Equity information: Beta is 1.21, Market return is 13.1%, and Risk-free rate is 5.1% Assume the company's tax rate is 40%. Calculate the WACC for this firm. 11.80% 12.78% 7.48% 9.19%
You are analyzing the after-tax cost of debt for a firm. You know that the firm's 12-year maturity, 17.00 percent semiannual coupon bonds are selling at a price of $1,483. Assuming that these bonds are the only debt outstanding for the firm. Problem 13.19 a1-a3(a1) What is the current YTM of the bonds? (Round intermediate calculations to 4 decimal places, eg. 1.2514 and final answer to 2 decimal places, e.g. 15.25%.) YTM %
5 Oberon, Inc. has a $45 million (face value) 8-year bond issue selling for 98 percent of par that pays an annual coupon of 8.10| What would be Oberon's before-tax component cost of debt? (Round your answer to 2 decimal places.) Cost of debt %

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