An all-equity company decides to recapitalize. The company has an unlevered beta of 1.1, the market risk premium is 6% and the risk-free rate is 5%. The company's tax rate is 25%. If the company starts to borrow with a 25% debt ratio, what will be the levered beta using Hamada’s equation? What is the cost of equity before and after the recapitalization respectively? Why is the cost of equity higher after the recapitalization?
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An all-equity company decides to recapitalize. The company has an unlevered beta of 1.1, the market risk premium is 6% and the risk-free rate is 5%. The company's tax rate is 25%.
- If the company starts to borrow with a 25% debt ratio, what will be the levered beta using Hamada’s equation?
- What is the
cost of equity before and after the recapitalization respectively? - Why is the cost of equity higher after the recapitalization?
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- Case 2: Cost of capital. a. Bellevue is a hotel company. It currently has a total enterprise value of 500, debt outstanding for 200, an which it pays cost of debt equal to 5%. You have also estimated that its beta of equity is 0.8, and the company faces a corporate tax of 25%. The risk-free rate you observe in the market is 3%, and you estimate the equity risk premium to be 6% What is Bellevue Warc? b. Suppose that Bellevue ints to expand its activity by taking over a restaurant company. You find three compa in the restaurant industry (Eatout, Goodfood and Dinein) that are listed in a stock exchange, so that you can gather relevant financial information. Bellevue is planning to fund the acquisition with the same capital structure of its main hotel business (ie =40%). Assuming that the corporate tax is 25%, the risk free rate is 3% and the equity risk premium is 6%, calculate the WACC that Bellevue should use for analyzing its planned investment in the restaurant industry.…I need help, please show me the calculation Questions: The cost of capital for a firm with a 60/40 debt/equity split, 4.5% cost of debt, 15% cost of equity, and a 35% tax rate would be? The risk free rate currently have a return of 2.5% and the market risk premium is 4.22%. If a firm has a beta of 1.42, what is its cost of equity? How much should you pay for a share of stock that offers a constant growth rate of 10%, requires a 16% rate of return, and is expected to sell for $77.77 one year from now?Dont use Al or CHATGPT. You are examining the pricing of banks by the market. The current return on equity, based on aggregate net income and book equity, is 13.5% and the cost of equity for banks is 10%. Collectively, banks are in stable growth, growing 2.5% year. Banks are trading at a discount of 10% on book value (i.e., PVB = 0.9) and you believe that the main reason for the discount is that investors are expecting capital requirements to be increased for banks. If the net income, cost of equity and expected growth rate remain unchanged, estimate how much of a capital increase, investors are expecting for banks in percentage terms? A. % 35.14 B. % 45.94C. % 51.23 D. % 58.25
- Your local grocery is asking you to help evaluate the store. You look up the unlevered beta of grocery stores in your area, and find that the beta is 0. 9 The firm is financed in 50% by equity, the rest is debt, which trades at the risk-free rate of 5%. The market risk premium is 30%, and the marginal corporate tax rate is 14%. 1. How much is rp? 2. Find rE 3. Find ra1) A firm that is currently unlevered has WACC = rS = 10%/year. This company plans to do a recapitalization by issuing debt and repurchasing equity. After the recapitalization, the debt-to-equity (D/E) ratio will be 0.5. If the cost of debt, rD, is 6%, what will be rS after the recapitalization? 2) A firm with wD = 0.35 and wS = 0.65 plans to issue another $100 million of permanent debt. The firm's tax rate is 21%. The bonds will be issued at par with coupon rate = rD = 7%/year. The firm's WACC is 11%/year. By how much will the new debt change the value of the firm, and who will receive this value? A) Firm value will increase by $21 million, and all $21 million will go to the shareholders B) Firm value will increase by $9 million, and 35% will go to the bondholders, 65% to the shareholders C) Firm value will increase by $18.6 million, and 35% will go to the bondholders, 65% to the stockholders D) Firm value will increase by $21 million, and all $21 million will go to the…A. CALCULATE the cost of equity capital of H Ltd., whose risk-free rate of return equals 10%. The firm's beta equals 1.75 and the return on the market portfolio equals to 15%. B. The current ratio of H Ltd is 5:1 and standard current ratio given by accounting bodies is 2:1? Do you think that H Ltd should try to reduce its current ratio?
- An all equity financed company currently has a beta of 1.2 and a marginal tax rate of 20%. The expected return on the market is 8%. The risk-free rate of return is 3%. The company's before-tax cost of debt is 5%. The company decides to alter its capital structure and will target 50% debt, which will remain constant. What is this company's new weighted average cost of capital (WACC)? a) 6.5% b) 7.7% c) 8.9% d) 10.2%Q1. A Corporation is trying to determine its optimal capital structure using the following table.The company estimates that the risk-free rate is 5%, the market risk premium is 6%, and its tax rate is 40%. Itestimates that if it had no debt, its beta, would be 1.2. Based on the information, what is the firm’s optimal capitalstructure, and what would the WACC be at the optimal capital structure?Case 2: Cost of capital. a. Bellevue is a hotel company. It currently has a total enterprise value of 500, debt outstanding for 200, on which it pays cost of debt equal to 5%. You have also estimated that its beta of equity is 0.8, and the company faces a corporate tax of 25%. The risk-free rate you observe in the market is 3%, and you estimate the equity risk premium to be 6%. What is Bellevue Wacc? b. Suppose that Bellevue wants to expand its activity by taking over a restaurant company. You find three companies in the restaurant industry (Eatout, Goodfood and Dinein) that are listed in a stock exchange, so that you can gather relevant financial information. Bellevue is planning to fund the acquisition with the same capital structure of its main hotel business (i.e.: D/EV=40%). Assuming that the corporate tax is 25%, the risk free rate is 3% and the equity risk premium is 6%, calculate the WACC that Bellevue should use for analyzing its planned investment in the restaurant industry.…
- 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)which one is correct please confirm? QUESTION 5 Heleveton Industries is 100% equity financed. Its current beta is 1.1. The expected market risk premium is 8.5%, and the risk-free rate is 4.2%. If Heleveton changes its capital structure to 25% debt, it estimates its beta will increase to 1.2. If the after-tax cost of debt will be 6%, should Heleveton make the capital structure change? a. Yes, cost of capital decreases 1.67% b. No, cost of capital increases by 0.85% c. Yes, cost of capital decreases by 2.52% d. No, stock price would decrease due to increased riskSuppose you own a clothing boutique to pass the time in your retirement. This business currently has no debt, no short-term investments, 100,000 shares outstanding, a beta of 1.2, current-year free cash flows of $ 100,000, and expected growth of 4% per year. a. If the current business tax rate is 40%, the risk-free rate is 4%, and the market risk premium is 8%, find the weighted average cost of capital (WACC), value of equity, and price per share for your firm. You know from your MBA finance course that leverage can add value to your firm, so you consider changing your capital structure. The banker gives you interest rate quotes for the following capital structures: wd 12.5% 25% 37.5% 50% rd 5.00% 7.00% 10.00% 12.00% b. Assuming you repurchase shares of stock with the money raised from the debt issuance, for each capital structure, calculate the new cost of equity, WACC, value of operations, and the amount of debt issued. What is the optimal capital structure for your boutique, and…