Monk, Inc. manufacturers and sells household cleaners under various brand names. The data in the following table
Question:
Monk, Inc. manufacturers and sells household cleaners under various brand names. The data in the following table applies to Monk, Inc. (dollar amounts in millions):
Total assets | $54,520 |
Interest-bearing debt | $17,625 |
Average pre-tax borrowing cost | 8.5% |
Common equity: | |
Book value | $9,612 |
Market value | $45,680 |
Income tax rate | 25% |
Market equity beta | 1.40 |
Assuming that riskless rate is 3.5% and the market premium is 6.2%, determine the following:
a. Monk's cost of equity capital.
b. The weight on debt capital that should be used to calculate Monk's weighted-average cost of capital.
c. The weight on equity capital that should be used to calculate Monk's weighted-average cost of capital.
d. Monk's weighted-average cost of capital.
e. Assume that Monk is a potential leveraged buyout candidate. Assume that the buyer intends to put in place a capital structure that has 60 percent debt with a pretax borrowing cost of 10 percent and 40 percent common equity. Compute the revised equity beta for Monk based on the new capital structure.
Applied Regression Analysis and Other Multivariable Methods
ISBN: 978-1285051086
5th edition
Authors: David G. Kleinbaum, Lawrence L. Kupper, Azhar Nizam, Eli S. Rosenberg