Question
6. Zonk Corp. The following data pertains to Zonk Corp., a manufacturer of ball bearings (dollar amounts in millions): Total assets $6,840 Interest-bearing debt $3,562
6. Zonk Corp. The following data pertains to Zonk Corp., a manufacturer of ball bearings (dollar amounts in millions):
Total assets | $6,840 |
Interest-bearing debt | $3,562 |
Average pre-tax borrowing cost | 11.5% |
Common equity: |
|
Book value | $2,560 |
Market value | $12,850 |
Income tax rate | 35% |
Market equity beta | 1.24 |
|
|
A) Assume that zonk is a potential leveraged buyout candidate. Assume that the buyer intends to put in place a capital structure that has 70 percent debt with a pretax borrowing cost of 14 percent and 30 percent common equity. Compute the revised equity beta for Zonk based on the new capital structure. A. 1.24 B. 4.77 C. 4.34 D. 3.91
B) Assume that Zonk is a potential leveraged buyout candidate. Assume that the buyer intends to put in place a capital structure that has 70 percent debt with a pre tax borrowing cost of 14 percent and 30 percent common equity. Compute the weighted average cost of capital for Zonk based on the new capital structure. A. 20.63% B. 12.56% C. 13.01% D. 9.94%
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