Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Cerrado SA operates in two segments via two different subsidiaries: Wood & Paper. Cerrado has a Debt-Equity ratio of 0.25 and a marginal tax

Cerrado SA operates in two segments via two different subsidiaries: Wood & Paper. Cerrado has a Debt-Equity

Cerrado SA operates in two segments via two different subsidiaries: Wood & Paper. Cerrado has a Debt-Equity ratio of 0.25 and a marginal tax rate of 40%. Every year, the Wood subsidiary generates $400 million revenues, whereas the Paper subsidiary generates $880 million revenues. Cerrado has outstanding 10-year bonds with yield to maturity of a B rating, which carry a historical default rate of 5.5%. Historically, investors holding bonds with a similarly risky profile experience a loss rate of 65% % in case of default. The risk-free rate is 4% and the market equity risk premium is 15%. You are further provided with the following information on comparable firms: Sector Median Beta Wood Paper a) Calculate Cerrado's Levered Beta. 1.40 1.30 Median D/E ratio 30% 70% 14% and Median tax rate 45% 35% b) Calculate Cerrado's WACC (Weighted-Averaged Cost of Capital). (5 marks) (5 marks) Cerrado SA operates in two segments via two different subsidiaries: Wood & Paper. Cerrado has a Debt-Equity ratio of 0.25 and a marginal tax rate of 40%. Every year, the Wood subsidiary generates $400 million revenues, whereas the Paper subsidiary generates $880 million revenues. Cerrado has outstanding 10-year bonds with yield to maturity of a B rating, which carry a historical default rate of 5.5%. Historically, investors holding bonds with a similarly risky profile experience a loss rate of 65% % in case of default. The risk-free rate is 4% and the market equity risk premium is 15%. You are further provided with the following information on comparable firms: Sector Median Beta Wood Paper a) Calculate Cerrado's Levered Beta. 1.40 1.30 Median D/E ratio 30% 70% 14% and Median tax rate 45% 35% b) Calculate Cerrado's WACC (Weighted-Averaged Cost of Capital). (5 marks) (5 marks) Cerrado SA operates in two segments via two different subsidiaries: Wood & Paper. Cerrado has a Debt-Equity ratio of 0.25 and a marginal tax rate of 40%. Every year, the Wood subsidiary generates $400 million revenues, whereas the Paper subsidiary generates $880 million revenues. Cerrado has outstanding 10-year bonds with yield to maturity of a B rating, which carry a historical default rate of 5.5%. Historically, investors holding bonds with a similarly risky profile experience a loss rate of 65% % in case of default. The risk-free rate is 4% and the market equity risk premium is 15%. You are further provided with the following information on comparable firms: Sector Median Beta Wood Paper a) Calculate Cerrado's Levered Beta. 1.40 1.30 Median D/E ratio 30% 70% 14% and Median tax rate 45% 35% b) Calculate Cerrado's WACC (Weighted-Averaged Cost of Capital). (5 marks) (5 marks) Cerrado SA operates in two segments via two different subsidiaries: Wood & Paper. Cerrado has a Debt-Equity ratio of 0.25 and a marginal tax rate of 40%. Every year, the Wood subsidiary generates $400 million revenues, whereas the Paper subsidiary generates $880 million revenues. Cerrado has outstanding 10-year bonds with yield to maturity of a B rating, which carry a historical default rate of 5.5%. Historically, investors holding bonds with a similarly risky profile experience a loss rate of 65% % in case of default. The risk-free rate is 4% and the market equity risk premium is 15%. You are further provided with the following information on comparable firms: Sector Median Beta Wood Paper a) Calculate Cerrado's Levered Beta. 1.40 1.30 Median D/E ratio 30% 70% 14% and Median tax rate 45% 35% b) Calculate Cerrado's WACC (Weighted-Averaged Cost of Capital). (5 marks) (5 marks)

Step by Step Solution

3.41 Rating (154 Votes )

There are 3 Steps involved in it

Step: 1

SOLUTION a To calculate Cerrados Levered Beta we need to use the median beta of comparable firms in ... blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Reporting Financial Statement Analysis And Valuation A Strategic Perspective

Authors: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

9th Edition

1337614689, 1337614688, 9781337668262, 978-1337614689

More Books

Students also viewed these Finance questions

Question

What are the 5 Cs of marketing channel structure?

Answered: 1 week ago

Question

What are four principles of effective post project reviews?

Answered: 1 week ago