Handmon Enterprises is currently an all-equity firm with an expected return of 10.4%, it is considering borrowing money to buy back some of its existing shores Assume perfect capital markets.Suppose Hardmon borrows to the point that its debt-equity ratio is 0.50. With this amount of debt, the debt cost of capital is 4%. What will be the expected return of equity after this transactionb. Suppose instead Hardmon borrows to the point that its debl-equity ratio is 1.50. With this amount of debt, Handmon's debt will be much riskier. As a result, the debt cost of capital will be 6%. Whatwill be the expected retum of equity in this case?A senior manager argues that it is in the best interest of the shareholders to choose the capital structure that leads to the highest expected return for the stock. How would you respond tothisa Suppose Harmon bonows to the point that its debt-equity radio is 0.50 With this amount of debt, the debt cost of capital is 4%. What will be the expected retum of equity after this transaction?The expected return isnis(Round to two decimal places)

The return that investors demand from a company that has included debt in its capital structure is…

*Suppose Handman bomows to the point that its debt-equity ratio is 0.50. With this amount of debt, the debt cost of capital is 4%. What will be the expected retum of equity after this transaction? b. Suppose instead Hardmon bomows to the point that its debl-equity radio is 1.50. With this amount of debt, Hardmon's debt be much riskier. As a result, the debt cost of capital will be 8% What will be the expected retum of equity in this case? A senior manager argues that it is in the best interest of the shareholders to choose the capital structure that leads to the highest expected retum for the stock How would you respond to this argument

*Suppose Handman bomows to the point that its debt-equity ratio is 0.50. With this amount of debt, the debt cost of capital is 4%. What will be the expected retum of equity after this transaction? b. Suppose instead Hardmon bomows to the point that its debl-equity radio is 1.50. With this amount of debt, Hardmon's debt be much riskier. As a result, the debt cost of capital will be 8% What will be the expected retum of equity in this case? A senior manager argues that it is in the best interest of the shareholders to choose the capital structure that leads to the highest expected retum for the stock How would you respond to this argument

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Hardmon Enterprises is currently an all-equity firm with an expected return of 18%. It is considering a leveraged recapitalization in which it would borrow and repurchase existing shares. (Assume perfect capital markets.) a. Suppose Hardmon borrows to the point that its debt-equity ratio is 0.50. With this amount of debt, the debt cost of capital is 5%. What will the expected return of equity be after this transaction? b. Suppose instead Hardmon borrows to the point that its debt-equity ratio is 1.50. With this amount of debt, Hardmon's debt will be much riskier. As a result, the debt cost of capital will be 7%. What will the expected return of equity be in this case? c. A senior manager argues that it is in the best interest of the shareholders to choose the capital structure that leads to the highest expected return for the stock. How would you respond to this argument? a. Suppose Hardmon borrows to the point that its debt-equity ratio is 0.50. With this amount of debt, the debt cost…
Hardmon Enterprises is currently an all-equity firm with an expected return of 18.3%. It is considering a leveraged recapitalization in which it would borrow and repurchase existing shares. Assume perfect capital markets. a. Suppose Hardmon borrows to the point that its debt-equity ratio is 0.50. With this amount of debt, the debt cost of capital is 5%. What will be the expected return of equity after this transaction? b. Suppose instead Hardmon borrows to the point that its debt-equity ratio is 1.50. With this amount of debt, Hardmon's debt will be much riskier. As a result, the debt cost of capital will be 7%. What will be the expected return of equity in this case? c. A senior manager argues that it is in the best interest of the shareholders to choose the capital structure that leads to the highest expected return for the stock. How would you respond to this argument?
Suppose that Taggart Transcontinental currently has no debt and has an equity cost of capital of 10%. Taggart is considering borrowing funds at a cost of 6% and using these funds to repurchase existing shares of stock. Assume perfect capital markets. If Taggart borrows until they achieved a debt-to-value ratio of 20%, then Taggart's levered cost of equity would be closest to: 11.0% 10.0% 9.2% 8.0%
The FMS Corporation needs to raise investment money amounting to $40 million in new equity. The firm’s market risk is βM = 1.4, which means the firm is believed to be riskier than the market average. The risk free interest rate is 2.8% and the average market return is 9% per year. What is the cost of equity for the $40 million?
(Use the following information for the next three questions). Consider a world with taxes but no other market imperfections. BLT machinery has a debt to equity ratio of 2/3. Its cost of equity is 20%, cost of debt is 4%, and tax rate is 35%. Assume that the risk-free rate is 4%, and market risk premium is 8%. Suppose the firm repurchases stock and finances the repurchase with debt, causing its debt to equity ratio to change to 3/2. What is the firm's new cost of equity? None of the choices New cost of equity is 26.05% New cost of equity is 23.59% New cost of equity is 16.32% New cost of equity is 28.00%
Suppose that AXA currently has no debt and has an equity cost of capital of 12%. AXA is considering borrowing funds at a cost of 6% and using these funds to repurchase existing shares of stock. Assume perfect capital markets. If AXA borrows until it achieved a debt‐to‐equity ratio of 1/2, then AXAʹs levered cost of equity would be closest to: A. 18.0% B. 6.0% C. 15.0% D. 10.0%
Hardmon enterprises is currently an all equity firm with an expected return of 16%. Its a leveraged recapitalization in which it would borrow and repurchase existing shares. Assume perfect capital markets. Suppose Hardmon borrows to the point that it’s debt-equity ratio is 1.50. With this amount of debt, the debt cost of capital is 8%. What will be the expected return of equity after this transaction?
In the world with perfect capital market and no taxes, Firm A is unlevered and has an equity beta equal to 2. Firm B is identical to Firm A except that it has a debt to equity ratio equal to one. Assuming B can borrow at 5% risk-free rate and that Firm’s cost of capital is 10%, What are the equity beta and the cost of equity of firm B? A. Firm B has Beta equal to 2, and a cost of equity equal to 0.1 B. Firm B has Beta equal to 4, and a cost of equity equal to 0.15 C. Firm B has Beta equal to 3, and a cost of equity equal to 0.125 D. Firm B has Beta equal to 1, and a cost of equity equal to 0.15
1) 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…
Archimedes Levers is financed by a mixture of debt and equity. You have the followinginformation about its cost of capital:rE =__, rD = 12%, rA = __,Beta(E) = 1.5, Beta(D) =__, Beta(A) = __,rf = 10%, rm = 18%, D/V = .5Can you fill in the blanks? Suppose now that Archimedes repurchases debt and issuesequity so that D / V = .3. The reduced borrowing causes r D to fall to 11%. How do theother variables change?
Suppose that Banana Computers has $1,000 in revenue this year, along with COGS of $400 and SG&A of $100. The required rate of return on its equity is 14%, and the risk-free rate is 5%. Assume that the COGS only include the marginal costs of selling a computer. Banana is considering adding $700 worth of debt with a coupon rate of 5% and an YTM of 7.9% to its capital structure. Suppose, revenues fall by $300,what is the percent change in net income with and without the debt? Assume that the total variable production costs remain the same. (Round the answer to one decimal places.) a. 59.2% and 40.8% b. 60.0% and 64.5% c. 64.5% and 60% d. 40.8% and 59.2%
9. Determining the optimal capital structure Aa Aa Understanding the optimal capital structure Review this situation: Universal Exports Inc. is trying to identify its optimal capital structure. Universal Exports Inc. has gathered the following financial information to help with the analysis. Debt Ratio Equity Ratio rd rs WACC 30% 70% 7.00% 10.50% 8.61% 40% 60% 7.20% 10.80% 8.21% 50% 50% 7.70% 11.40% 8.01% 60% 40% 8.90% 12.20% 8.08% 70% 30% 10.30% 13.50% 8.38% Which capital structure shown in the preceding table is Universal Exports Inc.'s optimal capital structure? Debt ratio = 40%; equity ratio = 60% Debt ratio 50%; equity ratio = 50% Debt ratio = 70%; equity ratio 30% Debt ratio = 30%; equity ratio = 70% Debt ratio = 60%; equity ratio = 40% Consider this case: Globo-Chem Co. is an all-equity firm, and it has a beta of 1. It is considering changing its capital structure to 65% equity and 35% debt. The firm's cost of debt will be 8%, and it will face a tax rate of 40%.

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