Question 1

The Abacus Computer Company has decided to use the Capital Asset Pricing Model to estimate its cost of equity.The firm's beta was estimated at 1.4.The S&P/TSX Composite-stock index has returned 12.5% to investors over a fairly long period of time,and Abacus has decided to use this value as the market return.Treasury bills are currently providing investors with a 6.5% yield.
A)Calculate Abacus's cost of equity using the CAPM.
B)If its beta was incorrectly estimated,and a new revised estimate of 1.8 was used in the calculations,what would its new estimate of the cost of equity be?

Accepted Answer

The answer of The Abacus Computer Company has decided to...

Question 2

Jury Company has the following capital structure: 55% debt,35% equity,and 10% preferred stock.
Calculate Jury's weighted average cost of capital (WACC)assuming no new common shares are issued,using the answers obtained from question 117.

Accepted Answer

The answer of Jury Company has the following capital structure:...

Question 3

Saven Travel Corporation is considering several investment opportunities in order to diversify its operations.Mr.Saven,president,is trying to determine the firm's cost of capital before he makes a decision.This diversification plan will require the firm to raise $400 million.A share of common stock is currently selling for $50,and the amount of the last dividend paid was $1.25.The company's earnings and dividends have been growing at about 12%,however,this is expected to drop to 9% per year in the future.Flotation costs of new common will be $4.00 per share.The firm can raise $150 million internally through retained earnings.The firm's investment dealer has informed Mr.Saven that this amount of equity can support $100 million in 12% coupon bonds.The company's tax rate is 46%.
A)Compute the weighted average cost of capital on the first $250 million of funds.
B)Saven Travel will need to raise $150 of additional capital for expansion.How much of this will be debt and equity?
C)Compute the marginal cost of capital on the additional $150 million assuming the cost of debt stays the same.
Kd = 12% (1 ─ .46)= 0.0648 = 6.48%

Accepted Answer

The answer of Saven Travel Corporation is considering several investment...

Question 4

Bibbidi Bobbidi Boo Fireplaces is considering the broadening of its horizons and is looking at investing into the carriage trade.Before any analysis of the cash flows can begin,the CEO,Ms.Cindy Ella,must select an appropriate discount rate.The accountant,Rick Tepsters,suggests the calculation of the cost of capital.
The following is the existing (book value)capital structure of BBB Fireplaces.

Accepted Answer

The answer of Bibbidi Bobbidi Boo Fireplaces is considering the...

Question 5

The M&M Theory Company has an unleveraged value of $3,250,000,$1,500,000 in debt,and a corporate tax rate of 34%.In addition,the firm's bankruptcy costs have been estimated at $800,000 and the probability of bankruptcy is 10%,calculate:
A) expected bankruptcy cost
B) Value of the firm

Accepted Answer

The answer of The M&M Theory Company has an unleveraged...

Quiz 11: Cost of Capital

Jury Company has the following capital structure: 55% debt,35% equity,and 10% preferred stock. Calculate Jury's weighted average cost of capital (WACC)assuming no new common shares are issued,using the answers obtained from question 117.

The M&M Theory Company has an unleveraged value of $3,250,000,$1,500,000 in debt,and a corporate tax rate of 34%.In addition,the firm's bankruptcy costs have been estimated at $800,000 and the probability of bankruptcy is 10%,calculate: A) expected bankruptcy cost B) Value of the firm