You have been asked to assess the capital structure for Galaxy Inc., a publicly traded firm...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
You have been asked to assess the capital structure for Galaxy Inc., a publicly traded firm that operates in the bottled water and beverage business. The balance sheet of the company is as follows (in millions): Assets Fixed Assets Current Assets 300 200 Liabilities Debt Equity 400 100 You run a regression of monthly stock returns of Galaxy Inc. against returns on the market index over the last five years and come up with the following regression: RGalaxy = 0.387% + 3.06 RMarketindex The variance of the stock is 32% and the variance of the market is 12%. The risk free rate is 3% and the market risk premium is 5%. Galaxy currently has 20 million shares outstanding, trading at $10 per share and $800 billion (in market value) in total debt outstanding. The pre-tax cost of debt for the company is 10% and the company has a BB credit rating. The marginal tax rate is 40% and the current pre-tax operating income of the firm is $100 million. The company has no preferred stocks. a. Estimate the cost of capital for the company. (6 marks) b. A bondholder in the firm is willing to accept 20 million newly issued shares in the company in exchange for $200 million in debt (which will be retired). This transaction will raise the company's bond rating to BBB and lower their pre-tax cost of debt to 7.5%. Estimate the new cost of capital, if you go through with the swap. From a cost of capital standpoint, which of the two options would you pick? (12 marks) You have been asked to assess the capital structure for Galaxy Inc., a publicly traded firm that operates in the bottled water and beverage business. The balance sheet of the company is as follows (in millions): Assets Fixed Assets Current Assets 300 200 Liabilities Debt Equity 400 100 You run a regression of monthly stock returns of Galaxy Inc. against returns on the market index over the last five years and come up with the following regression: RGalaxy = 0.387% + 3.06 RMarketindex The variance of the stock is 32% and the variance of the market is 12%. The risk free rate is 3% and the market risk premium is 5%. Galaxy currently has 20 million shares outstanding, trading at $10 per share and $800 billion (in market value) in total debt outstanding. The pre-tax cost of debt for the company is 10% and the company has a BB credit rating. The marginal tax rate is 40% and the current pre-tax operating income of the firm is $100 million. The company has no preferred stocks. a. Estimate the cost of capital for the company. (6 marks) b. A bondholder in the firm is willing to accept 20 million newly issued shares in the company in exchange for $200 million in debt (which will be retired). This transaction will raise the company's bond rating to BBB and lower their pre-tax cost of debt to 7.5%. Estimate the new cost of capital, if you go through with the swap. From a cost of capital standpoint, which of the two options would you pick? (12 marks)
Expert Answer:
Answer rating: 100% (QA)
a To estimate the cost of capital for Galaxy Inc we need to find the cost of equity and the cost of ... View the full answer
Related Book For
Posted Date:
Students also viewed these finance questions
-
The last balance sheet of Lotus company is as follows Assets: Current Assets: 20 000 000 Long-Term Assets: 80 000 000 Total Assets: 100 000 000 Liabilities and Equity Account Payables: 4 000 000...
-
You have been asked to assess the expected financial impact of each of the following proposals to improve the profitability of credit sales made by your company. Each proposal is independent of the...
-
You have been asked to assess the expected financial impact of each of the following proposals to improve the profitability of credit sales made by your company. Each proposal is independent of the...
-
Manual programming for the following picture : 3.000 2.250 1.500 .750 PART#:00002 ZEE & SLOTS (MANUAL PROGRAMMING) 5.0 REF. .500 5 1.375 3.000 2.250 TITLE: PART#: 00002 (ZEE & SLOTS) DRAWN BY:...
-
Boarders sells a snowboard, Xpert, that is popular with snowboard enthusiasts. Below is information relating to Boarderss purchases of Xpert snowboards during September. During the same month, 121...
-
In San Francisco, the minimum wage is $15 per hour. Restaurants that have more than 20 employees must also provide them with health insurance, paid sick leave, and paid parental leave. In response,...
-
Wear Art produces precut fabrics for three products: dresses, jackets, and blouses. Joint cost is allocated on the basis of relative sales value at split-off. The company can choose to process each...
-
Yaovi Akpawu operates Yaovis Cricket Farm in Thunder Bay, Ontario. Yaovis raises about 18 million crickets a month. Most are sold to pet stores at $12.60 for a box of 1,000 crickets. Pet stores sell...
-
Scenario 2 :Considering the calculations you have done so far, you need to attend to a number of import transactions for goods that companies in the United States expressed interest in . The first...
-
Categorize each of the following characteristics as being more representative of either traditional manufacturing or lean production. 1. Quality tends to be inspected-in rather than built-in. 2....
-
The orthocentre of the triangle formed by the lines lx+my+n=0 and ax+2hxy+by=0 is
-
Use matlab6. Numerical differentiation: (1) avec = [1 2 3 3 6 8] , diff(avec,2) computes the second difference by applying diff(avec) recursively 2 times, and write the answer of diff(avec,2). (2)...
-
Expected return on security X is 2 0 % , expected return on security Y is 3 0 % , risk ( % ) of security X is 1 0 % and that of Y is 1 6 % . If coefficient of correlation between the returns of X and...
-
Assume you are the marketing manager for a new, high-end brand of jeans from the UK. A reason why selective distribution may be a better choice than exclusive distribution for a small unknown brand...
-
Your manager suggests determining the price based on a discounted dividend model and a discounted free cash flow valuation method. However, these two methods may produce very different estimates when...
-
A retaining wall .X m high was designed to stabilize a horizontal ground surface. The back of the wall is inclined 20 to vertical direction and can be assumed rough with interface friction angle of...
-
What are the primary causes of job shortages in different regions of the world? How do job shortages impact economic stability and growth in different countries? What are the psychological and social...
-
A handrail, which weighs 120 N and is 1.8 m long. was mounted to a wall adjacent to a small set of steps (Figure P4.26). The support at A has broken, and the rail has fallen about the loose bolt at 8...
-
You are attempting to structure a debt issue for Eaton Corporation, a manufacturer of automotive components. You have collected the following information on the market values of debt and equity for...
-
Assess the likelihood that the following firms will be taken over, based on your understanding of the free cash flow hypothesis. You can assume that earnings and free cash flows are highly...
-
The following table lists the stock prices for Microsoft from 1989 to 1998. The company did not pay any dividends during the period Year Price (dollars) 1989 .......... 1.20 1990 .......... 2.09 1991...
-
Complete the cell entries in Table 10-2, which lists the various activities performed in the revenue cycle and the journal entries, documents, data, and control issues associated with them. Table...
-
Match threats in the first column to appropriate control procedures in the second column. Threat 1. Sending incorrect merchandise Control Procedure a. Perform a completeness check 2. Crediting...
-
The Family Support Center is a small charitable organization. It has only four full-time employees: two staff, an accountant, and an office manager. The majority of its funding comes from two...
Study smarter with the SolutionInn App