Assume perfect capital markets. Consider two firms, Firm X and Firm Y, that have identical assets that generate identical cash flows. Firm Y is an all-equity firm, with 2 million shares outstanding that trade for a price of $28 per share. Firm X has 2 million shares outstanding and $24 million in debt at an interest rate of 5%. According to MM Proposition I, the stock price for Firm X is closest to (Hint: Find the value of equity of the levered firm and divide by the number of shares) $8.00 $6.00 $24.00 $12.00 $18.00
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- Assume there are two firms with a MV of $50,000,000. Firm A consists of 10% debt and 90% equity. Firm B consists of 40% debt and 60% equity. Assume perfect capital markets and M&M Proposition 2 holds. Which firm will have a higher expected return for equity holders? Why? For the toolhar prace ALT+F10/PC or ALT+FN+F10 (Mac).Scanlon Inc.'s CFO hired you as a consultant to help her estimate the cost of capital. You have been provided with the following data: risk-free rate rRF = 4.10%; expected dividend D1-$1.5, dividend growth rate 6%, market price of stock PO = $38, flotation cost = 10%. Based on the Discounted Cash Flow Model (DCF) approach, what is the cost of equity from selling new common stock? 8.67% 12.97% 9.35% 10.04% 10.38%You have been hired as a consultant by Capital Pricing Company's CFO, who wants you to help her estimate the cost of capital. You have been provided with the following data: risk free rate = 5%; market risk premium = 9.3%; and beta = 1.12. Based on the CAPM approach, what is the cost of common stock from reinvested earnings?
- Consider the following security: Brous Metalworks Earnings Per Share, Time = 0 $2.00 Dividend Payout Rate 0.250 Return on Equity 0.150 Market Capitalization Rate 0.125 Required: Using the information in the tables above, please calculate the sustainable growth rate, dividends per share, and intrinsic value per share. Then solve for the present value of growth opportunities. (Use cells A5 to B8 from the given information to complete this question.) Brous Metalworks Sustainable Growth Rate Dividends per share (Next Year) Intrinsic Value No-Growth Value Per Share Present Value of Growth Opportunities (PVGO)6. Company cost of capital (S9.2) Nero Violins has the following capital structure: Total Market Value ($ millions) $100 Security Debt Preferred stock Common stock Beta 0 0.20 1.20 40 299 a. What is the firm's asset beta? (Hint: What is the beta of a portfolio of all the firm's securities?) b. Assume that the CAPM is correct. What discount rate should Nero set for investments that expand the scale of its operations without changing its asset beta? Assume a risk-free interest rate of 5% and a market risk premium of 6%. Ignore taxes.Q2. Suppose you are the chief financial officer of Toktik Co. and you are trying to determine the optimal capital structure for the company using the cost of capital approach. On the day of this exam, you have collected the following company and market data: The beta of the company is 2.6; • 10-year Treasury bond rate is 1.6% and the current market equity risk premium is 6.9%; • The company's current bond rating is BB by Standard & Poor's; • The firm currently has 5.2 billion shares outstanding with share price at $120 and the firm's market value of debt is $264 billion • The company's marginal tax rate is 35%. Also you are given the following table concerning the latest information on bond rating and the corresponding default spread: Default spread Rating AAA 0.69% AA 0.85% A+ 1.07% A 1.18% А- 1.33% BBB 1.71% BB+ 2.31% BB 2.77% B+ 4.05% 4.86% В- 5.94% ССС 9.46% CC 9.97% 13.09% D 17.44% Required: a) Briefly explain, by referencing relevant capital structure theories, the mechanisms…
- Please show the solution. Thank you. 1. Company X is interested in calculating its weighted-average cost of capital. Company X has a current financial structure that is composed of 50% debt, 40% ordinary shares, and 10% preference shares. Ignore the effects of cost of retained earnings. The beta of Company X shares is 0.7, and the current risk-free rate of return is 4%. The market risk premium is 6%. The dividend on Company X preference shares is set at P2.25, and the net issuance price per share (which happens to be the same as the current price per share) of preference shares is P30. Debt issued by Company C yields an 11% stated interest rate to investors. The marginal tax rate for Company X is 40%. What is the weighted-average cost of capital for Company X?Nero Violins has the following capital structure: Security Beta Total Market Value ($ millions) Debt 0 $ 102 Preferred stock 0.22 42 Common stock 1.22 301 What is the firm's asset beta? (Hint: What is the beta of a portfolio of all the firm's securities?) Note: Do not round intermediate calculations. Round your answer to 3 decimal places. Assume that the CAPM is correct. What discount rate should Nero set for investments that expand the scale of its operations without changing its asset beta? Assume a risk-free interest rate of 7% and a market risk premium of 8%. Ignore taxes. Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.1. In this section we examine three theories of investor preference: The dividend irrelevance theory. The "bird in the hand" theory, the tax preference theory, which theory is the best? What is the different of stock dividends, stock splits, and stock repurchase. 2. In the working capital management, we know about cash conversion cycle model. For problem if average inventories are $3 million and sales are $11 million. If receivables are S 657.535 and sales are $ 11 million. Then, if its cost of goods sold are $9 million per year and if its accounts payable average S 657.535. What is the length of the cash conversion sicle? 3. The ELGRAJO Corporation has a capital structure as follow (consider is optimal): 25% Debt, 15% Preference Stock, and 60% Common Stock. Totally 100%. Expected net profit is 17.142.860,- this rear. 30% Dividend payout ratio, tax is 40% and investor expecting an income and growth dividend is 9% (g) on the future. Last year, company did pay dividend (Do) as 3.600…
- Eaton Electronic Company's treasurer uses both the capital asset pricing model and the dividend valuation model to compute the cost of common equity (also referred to as the required rate of return for common equity). Assume: Rf Km = 8% = 6% = В D₁ = $0.60 Po = $20 8 = 5% = 1.8 a. Compute K; (required rate of return on common equity based on the capital asset pricing model). Note: Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Ki 0.10% b. Compute Ke (required rate of return on common equity based on the dividend valuation model). Note: Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Ke %A)Company Z is a computer manufacturing company that is considering diversifying into financial services. This will require an investment of £100 million and this is to be raised via an equity issue. Given the following information, calculate the weighted average cost of capital (WACC) making sure that you clearly state any assumptions made: Dividend per share, d0 = 10p.The market price per share, PE = 108p cumulative div.Earnings per share, eps = 15p.Book Value of Capital Employed = £8,400,000.There are 28 million shares in issue.£30m. 17% irredeemable debt currently quoted at £120 ex int. 800,000, 8% redeemable debentures which are redeemablein 4 years’ time and have a current market price of £82.50 ex int. £5m. 7-year term loan at 5% over base.Bank base rate = 11%.Corporation tax = 30%. B)What assumptions lie behind the use of the WACC as a discount rate in investment appraisal. C)In light of the above assumptions and the answer to part (a), is it safe for Company Z to use the…Assume that Amazon is also considering investing in the carwash business. In terms of capital structure, Amazon and Spffiy have a similar level of debt -- let's assume that their capital structure (% of debt vs. % of market value of equity) is identical. The Beta for Spffiy stock is 0.54. The Beta for Amazon's stock Is 1.81. Based on this information please answer the following: 1) Which company, Spiffy or Amazon, would you assume (based on the above) to have a lower WACC? Why? 2) Based on your answer to question 1, based on the NPV tool, to which company would investment in the carwash business look more attractive. 3) Does it make sense for bothSpiffy and Amazon to use their company wide WACC to evaluate an investment in the carwash business? Why or why not?