Estimate the weighted-average cost of capital for Home Depot (HD), Altria (MO), Caterpillar (CAT), and Intel (INTC). You can estimate the expected stock returns for these companies by using the betas shown on finance.yahoo.com. You can also use Yahoo! Finance to find the relative proportions of equity and debt for each company. Remember, though, to use the mar- ket value of the equity, not its book value. Finding the yield on the debt is a little trickier. One possibility it to log on to the Federal Reserve Bank of St. Louis site at https://fred.stlouisfed .org/ to find the current level of Treasury yields and the yield spreads (i.e., the extra yield for bonds with different ratings). An alternative is to view recent transactions at www.finra.org /industry/trace/corporate-bond-data. Note: As we write this, Moody's provides an A rating for all four companies.

Estimate the weighted-average cost of capital for Home Depot (HD), Altria (MO), Caterpillar (CAT), and Intel (INTC). You can estimate the expected stock returns for these companies by using the betas shown on finance.yahoo.com. You can also use Yahoo! Finance to find the relative proportions of equity and debt for each company. Remember, though, to use the mar- ket value of the equity, not its book value. Finding the yield on the debt is a little trickier. One possibility it to log on to the Federal Reserve Bank of St. Louis site at https://fred.stlouisfed .org/ to find the current level of Treasury yields and the yield spreads (i.e., the extra yield for bonds with different ratings). An alternative is to view recent transactions at www.finra.org /industry/trace/corporate-bond-data. Note: As we write this, Moody's provides an A rating for all four companies.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter13: Capital Structure Concepts

Section: Chapter Questions

Problem 10P

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.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: rRF = 4.10%; RPM = 5.25%; and b = 0.70. Based on the CAPM approach, what is the cost of equity?
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?
Your colleague collects the information in Table 1. Included are D/E ratios and estimated equity betas for firms similar to the take-over tarket, the target firm's Debt-to-Firm Value ratio, the target firm's tax rate, and the average YTM and coupon payments for their outstanding debt. Using this data, find the appropriate WACC for this investment decision. Hint: Firm Value is Debt + Equity. Therefore, D/(D+E) = 0.2. Use this to solve for D/E, the target firm's leverage ratio. D/E Equity Beta Target D/V 20% Competitor 1 29.90% 2.68 Tax Rate 40% Competitor 2 -7.60% 1.94 Average YTM 6% Competitor 3 32.20% 1.92 Average Coupon 6.50% Competitor 4 49.70% 1.12 Equity Market Risk Premium 5% Competitor 5 21.70% 0.97 Treasury Note 4.93% Competitor 6 34.30% 2.13 WACC Competitor 7 28.50% 1.27 Competitor 8 -6.70% 1.01 Competitor 9 42.60% 0.98
Please explain the following identity for the Weighted Average Cost of Capital or WACC. Why is the WACC important for those companies making capital investments? WACC where Re Rf + Beta (Rm - Rf) Debt Tx) ( (Debt equity) = Rd (1-Tx) - +
Calculate the Weighted Average Cost of Capital (WACC) for McCormick and Company using the formula WACC = (WD x RD x (1-T)) + (WS x Rs) Note that -- Rs = the cost of equity Rd = the cost of debt T = the tax rate WD = Value of debt / (Value of debt plus value of equity) WS = Value of equity / (Value of debt plus value of equity) **Note that the weight of debt plus the weight of equity must total to 100%, as there are only two components in the capital structure.** In order to estimate the weights of debt and equity in the total capital structure, the CFO suggests using the book value of debt and the market value of equity. To determine the book value of debt, use data from the year end November 2019 McCormick 10-K. Look on the Balance sheet and add the following -- Short term borrowings, Current portion of long term debt, and Long term debt. To determine the market value of equity, use the following data: On March 17, 2020 the market value of equity (or "Market Cap")…
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 %
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Which of the following statements is most correct? (Hint: Work Problem 4-16 before answering 4-17, and consider the solution setup for 4-16, as you think about 4-17.) a. If a firm's expected basic earning power (BEP) is constant for all of its assets and exceeds the interest rate on its debt, then adding assets and financing them with debt will raise the firm' expected return on common equity (ROE). b. The higher its tax rate, the lower a firm's BEP ratio will be, other things held constant. c. The higher the interest rate on its debt, the lower a firm's BEP ratio will be, other things held constant. d. The higher its debt ratio, the lower a firm's BEP ratio will be, other things held constant. e. If a firm's expected basic earning power (BEP) is constant for all of its assets and exceeds the interest rate on its debt, then adding assets and financing them with debt will decrease the firm's expected return on common equity (ROE).
You were recently hired by Scheuer Media Inc. to estimate its cost of capital. You obtained the following data: D 1 = $2.65; P 0 = $50.00; g = 6.00% (constant); and F = 4.00%. What is the cost of equity raised by selling new common stock?
A company hired you as a consultant to help estimate its cost of capital. You have obtained the following data: D0 = $2.45; P0 = $28.96; and g = 4.06% (constant). What is the cost of equity from retained earnings? Do not round your intermediate calculations. Express your answer as a percent rounded to two decimal places. (For example, 4.567% should be entered as 4.57)
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