To estimate the cost of capital of an e-commerce firm, you are told that the firm...
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To estimate the cost of capital of an e-commerce firm, you are told that the firm comprises 50 percent advertising and 50 percent internet assets. You have information on two comparable firms, both of which maintain constant debt to value ratios over time: Advertising firm Internet firm BD/E Be 1.8 0.1 1 1.3 0 0.25 The e-commerce firm plans to target a debt to equity ratio of 5 percent. The risk-free rate is 4 percent, the market risk premium is 6 percent, and the tax rate is 25 percent. (a) What is the firm's asset beta? (b) What is the firm's unlevered cost of capital? (c) What is the firm's equity beta (assume 8-0)? (d) What is the firm's weighted average cost of capital? (e) If the firm's cash flows and debt interest payments are perpetual, and it pays 1.5 million of interest each year, what are its total debt and enterprise value? (f) Suppose the firm has no depreciation, capital expenditures, or changes to net working capital needs. If the firm's cash flows are perpetual, what is the firm's perpetual EBIT? (g) Suppose the cost of debt is actually 5 percent. What does this imply is the firm's debt beta? (h) True/False. The cost of capital decreases when firms increase leverage. (Explain your reasoning.) To estimate the cost of capital of an e-commerce firm, you are told that the firm comprises 50 percent advertising and 50 percent internet assets. You have information on two comparable firms, both of which maintain constant debt to value ratios over time: Advertising firm Internet firm BD/E Be 1.8 0.1 1 1.3 0 0.25 The e-commerce firm plans to target a debt to equity ratio of 5 percent. The risk-free rate is 4 percent, the market risk premium is 6 percent, and the tax rate is 25 percent. (a) What is the firm's asset beta? (b) What is the firm's unlevered cost of capital? (c) What is the firm's equity beta (assume 8-0)? (d) What is the firm's weighted average cost of capital? (e) If the firm's cash flows and debt interest payments are perpetual, and it pays 1.5 million of interest each year, what are its total debt and enterprise value? (f) Suppose the firm has no depreciation, capital expenditures, or changes to net working capital needs. If the firm's cash flows are perpetual, what is the firm's perpetual EBIT? (g) Suppose the cost of debt is actually 5 percent. What does this imply is the firm's debt beta? (h) True/False. The cost of capital decreases when firms increase leverage. (Explain your reasoning.)
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a Asset Beta Asset05180513 Asset09065 Asset155 b Unlevered Cost of Capital Using the Capital Asset P... View the full answer
Related Book For
Entrepreneurial Finance
ISBN: 978-1305968356
6th edition
Authors: J. Chris Leach, Ronald W. Melicher
Posted Date:
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