Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

(Estimated time allowance: 27 minutes) Chiquitica Company currently does not use any debt at all (it is an all- equity firm). The firm has

image text in transcribed

(Estimated time allowance: 27 minutes) Chiquitica Company currently does not use any debt at all (it is an all- equity firm). The firm has 4,000,000 shares selling for $50 per share. Its beta is 0.8, and the current risk-free rate is 2%. The expected market return for the coming year is 12%. Chiquitica Company will sell $40,000,000 in corporate bonds with a $1,000 par value. The bonds have a yield to maturity of 12%. When the bonds are sold, the beta of the company will increase to 1.2. Chiquitica will use the entire proceeds of the bond sale to repurchase an equal dollar amount of its equity (buyback shares). The corporate tax rate is 25%. 1. What is the WACC of Chiquitica Company before the bond sale? Enter using the %, for example if you obtain 0.20 then enter 20%. A/ 2. What is the market value of debt after the bond sale? Do not use dollar sign. Round to the nearest dollar. Use commas to separate A 3. What is the market value of equity after the bond sale? Do not use dollar sign. Round to the nearest dollar. Use commas to separate thousands. thousands. A 4. What is the weight for equity in the capital structure (the value E/V) - used to compute the WACC? Enter using the %, for example if you obtain 0.20 then enter 20% A 5. What is the cost of debt after the bond sale? Enter using the % and TWO decimal places, for example if you obtain 4.20% then enter 4.20% 6. What is the cost of equity after the bond sale? Enter using the % and TWO decimal places, for example if you obtain 4.20% then enter 4.20% A 7. What is the adjusted WACC of A Chiquitica Company after the bond sale? Enter using the % and TWO decimal places, for example if you obtain 4.20% then enter 4.20%

Step by Step Solution

There are 3 Steps involved in it

Step: 1

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

Personal Finance

Authors: Thomas Garman, Raymond Forgue

12th edition

9781305176409, 1133595839, 1305176405, 978-1133595830

More Books

Students also viewed these Finance questions