In both problems, use a market risk premium of 5.5% Problem 1 Terck Inc., a leading...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
In both problems, use a market risk premium of 5.5% Problem 1 Terck Inc., a leading pharmaceutical company, currently has a balance sheet that is as follows: Assets Fixed Assets 1700 Current Assets 1000 2700 Total The firm's income statement looks as follows: 1000 400 100 500 100 Liability LT Bonds Equity Total Revenues COGS Depreciation EBIT LT Interest EBT Taxes Net Income $900 $1800 $2700 400 200 200 The firm's bonds are all 20-year bonds with a coupon rate of 10% which are selling at 90% of face value (the yield to maturity on these bonds is 11%). The stocks are selling at a PE ratio of 9 and have a beta of 1.25. The six-month T.Bill rate is 6%. a. What is the firm's current cost of equity? b. What is the firm's current after-tax cost of debt? c. What is the firm's current weighted average cost of capital? CONT. PROBLEM 1 Assume that management of Terck Inc., which is very conservative, is considering doing an equity-for-debt swap (i.e. issuing $200 more of equity to retire $200 of debt). This action is expected to lower the firm's interest rate by 1%. d. What is the firm's new cost of equity? e. What is the new WACC? f. What is the change in the firm's value? In both problems, use a market risk premium of 5.5% Problem 1 Terck Inc., a leading pharmaceutical company, currently has a balance sheet that is as follows: Assets Fixed Assets 1700 Current Assets 1000 2700 Total The firm's income statement looks as follows: 1000 400 100 500 100 Liability LT Bonds Equity Total Revenues COGS Depreciation EBIT LT Interest EBT Taxes Net Income $900 $1800 $2700 400 200 200 The firm's bonds are all 20-year bonds with a coupon rate of 10% which are selling at 90% of face value (the yield to maturity on these bonds is 11%). The stocks are selling at a PE ratio of 9 and have a beta of 1.25. The six-month T.Bill rate is 6%. a. What is the firm's current cost of equity? b. What is the firm's current after-tax cost of debt? c. What is the firm's current weighted average cost of capital? CONT. PROBLEM 1 Assume that management of Terck Inc., which is very conservative, is considering doing an equity-for-debt swap (i.e. issuing $200 more of equity to retire $200 of debt). This action is expected to lower the firm's interest rate by 1%. d. What is the firm's new cost of equity? e. What is the new WACC? f. What is the change in the firm's value?
Expert Answer:
Answer rating: 100% (QA)
a What is the firms current cost of equity ANSWER r Rf RM Rf r 6 12511 6 r 1125 Thus the firms curre... View the full answer
Related Book For
Posted Date:
Students also viewed these finance questions
-
Terck, a leading pharmaceutical company, currently has a balance sheet that is as follows: The firms income statement looks as follows: Revenues.............. $1,000 Cost of goods sold (COGS)...
-
Consider an annual bond with a coupon rate of 10 percent, four years to maturity, and a current price of $1,100. Suppose the yield on the bond suddenly increases by 200 basis points. a) What is the...
-
You have been told that the yield to maturity on 3-month treasury bills is 4% and t he current inflation rate is 2%. Estimate the real rate of interest.
-
The programming language is Java and all of the Classes I was given are in bold. ALIEN CLASS import imagePackage.RasterImage; import java.awt.BasicStroke; import java.awt.Color; import...
-
Viking Voyager specializes in the design and production of replica Viking boats. On January 1, the company issues $ 3,000,000 of 7% bonds, due in 10 years, with interest payable semiannually on June...
-
1. Howard City should use a capital projects fund to account for: a. Proceeds of a capital grant to finance a new civic center that will not provide services primarily on a user-charge basis b....
-
With the increase in pressure ratio thermal efficiency of a simple gas turbine plant with fixed turbine inlet temperature (a) increases (b) decreases (c) first increases and then decreases (d) first...
-
Rogers made a contract with Salisbury Brick Corp. that allowed it to remove earth and sand from land he owned. The contract ran for four years with provision to renew it for additional four-year...
-
Timter Company uses a normal job-order costing system. The company has two departments through which most jobs pass. Selected budgeted and actual data for the past year follow: Budgeted overhead...
-
Suppose your company introduces a referral incentive for existing customers. Namely, cus- tomers can get a $500 discount on their customer service subscription for each customer lead that they refer...
-
How has the operational relationship between the U.S. intelligence community evolved since 2015?
-
Water usage varies greatly in different countries, from as little as 20 liters a day per capita (per person) in some third-world countries, to several hundred liters a day in some industrialized...
-
An individual has the genotype AO, hh. What antigens would be present on the red cells of this individual? What antibodies does this individual have?
-
Provide benchmarks against which you can measure yourself. Your ability, for example, to achieve what your culture defines as success contributes to a positive self-concept; your failure to achieve...
-
When managers use the I/O model, why do they consider industry characteristics such as economies of scale and market friction in their decision-making? It highlights unique resources that are...
-
What are the different changes that will dramatically occur during adolescence, Briefly explain each. 2) How do quality relationships influence positive outcomes?
-
Steve and Alicia were married in a community property state in 1994. The couple's first child, Alexa, was born in 1999, at which time Alicia left her position as a Maricopa County attorney. Alicia...
-
Les has collected stamps in his spare time for years. He purchased many of his stamps at a price much lower than the current market value. Les recently lost his job as a carpenter. Since his wife...
-
Plastico, a manufacturer of consumer plastic products, is evaluating its capital structure. The balance sheet of the company is as follows (in millions): In addition, you are provided the following...
-
Consider the project described in Problem 6. Assume that the firm plans to finance 40% of its net capital expenditure and working capital needs with debt. a. Estimate the cash flow to equity for each...
-
Pfizer, a major pharmaceutical company, has a debt ratio of 10.30% and is considering increasing its debt ratio to 30%. Its cost of capital is expected to drop from 14.51% to 13.45%. Pfizer had an...
-
Most countries in Europe do not have stringent laws to protect whistleblowers. True/false
-
In view of significant financial losses to investors, corporate fraud does not really affect the U.S. economy and investor confidence. True/false
-
The National Crisis Inquiry Report (2011) concluded that the financial crisis was unavoidable. True/false
Study smarter with the SolutionInn App