Question
Big Red Trucking (BRT) currently provides trucking and storage services to an upper-midwest clientele. BRT is considering an expansion of its geographic coverage into the
Big Red Trucking (BRT) currently provides trucking and storage services to an upper-midwest clientele. BRT is considering an expansion of its geographic coverage into the northeastern US markets. Exploring opportunities other than building entirely new facilities, BRT has identified a privately held acquisition target, Northeastern Transportation. Northeastern's business is identical to BRT's. Therefore, BRT plans to value Northeastern's cash flows using its own WACC.
Currently, BRT has a $260 million commercial bank loan at 9.70%. BRT has 20 million shares of common stock outstanding with a current price of $37.00 per share. The beta for BRT's stock is estimated to be 1.82. BRT is in the 35% tax bracket.
The risk-free rate is 6.35% and the market risk premium is 5.00%. Answer the first eight questions using this information.
#1 We know that: -- BRT has a $260 million commercial bank loan at 9.70%. -- BRT has 20 million shares of common stock outstanding with a current price of $37.00 per share. -- BRT's enterprise value is $1 billion. -- The beta for BRT's stock is estimated to be 1.82. -- BRT is in the 35% tax bracket. -- The risk-free rate is 6.35%. -- The market risk premium is 5.00%.
To find the WACC, we need to know the percentage of enterprise value attributable to equity. What percentage of BRT's enterprise value is attributable to equity?
a. 14%
b. 16%
c. 26%
d. 74%
#2 We know that:
- BRT has a $260 million commercial bank loan at 9.70%.
- BRT has 20 million shares of common stock outstanding with a current price of $37.00 per share.
- BRT's enterprise value is $1 billion.
- The beta for BRT's stock is estimated to be 1.82.
- BRT is in the 35% tax bracket.
- The risk-free rate is 6.35%.
- The market risk premium is 5.00%.
What is BRT's after-tax cost of debt?
a. 6.3%
b. 9.7%
c. 35%
d. 74%
#3 We know that:
- BRT has a $260 million commercial bank loan at 9.70%.
- BRT has 20 million shares of common stock outstanding with a current price of $37.00 per share.
- BRT's enterprise value is $1 billion.
- The beta for BRT's stock is estimated to be 1.82.
- BRT is in the 35% tax bracket.
- The risk-free rate is 6.35%.
- The market risk premium is 5.00%.
What is the rate required by BRT's equity holders?
a. 6.30%
b. 15.35%
c. 5%
d. 74%
#4 We know that:
- BRT has a $260 million commercial bank loan at 9.70%.
- BRT has 20 million shares of common stock outstanding with a current price of $37.00 per share.
- BRT's enterprise value is $1 billion.
- rE = 15.35%
- rD(1-Tc) = 6.3%
- The beta for BRT's stock is estimated to be 1.82.
- BRT is in the 35% tax bracket.
- The risk-free rate is 6.35%.
- The market risk premium is 5.00%.
What is BRT's WACC?
a. 13%
b. 26%
c. 35%
d. 74%
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