Consider two firms A and B, which are in the same consumer business. Firm A is...
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Consider two firms A and B, which are in the same consumer business. Firm A is debt free and Firm B is financed by a mixture of debt and equity. The tax rate is 25%. Firm A has a cost of equity of 7% and beta of 0.8. Firm B is in stable growth. It will pay a dividend of $3.1 per share at the end of Year 1, and dividends will grow at a constant rate of 2% thereafter. Using the Dividend Discount Model, the intrinsic value of Firm B is estimated at $50 per share. Firm B has a levered beta of 1.04. a. What is the risk free rate? [1 point] b. What is Firm B's market value D/E ratio? [1 point] c. Suppose Firm B can issue a 10-year bond today with a default spread of 3.5%. What is the WACC of Firm B? [1 point] Consider two firms A and B, which are in the same consumer business. Firm A is debt free and Firm B is financed by a mixture of debt and equity. The tax rate is 25%. Firm A has a cost of equity of 7% and beta of 0.8. Firm B is in stable growth. It will pay a dividend of $3.1 per share at the end of Year 1, and dividends will grow at a constant rate of 2% thereafter. Using the Dividend Discount Model, the intrinsic value of Firm B is estimated at $50 per share. Firm B has a levered beta of 1.04. a. What is the risk free rate? [1 point] b. What is Firm B's market value D/E ratio? [1 point] c. Suppose Firm B can issue a 10-year bond today with a default spread of 3.5%. What is the WACC of Firm B? [1 point]
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Related Book For
Intermediate Financial Management
ISBN: 9780357516669
14th Edition
Authors: Eugene F Brigham, Phillip R Daves
Posted Date:
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