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I am 1000% lost on how to even begin to tackle this question for my homework, I would appreciate any help that could help explain
I am 1000% lost on how to even begin to tackle this question for my homework, I would appreciate any help that could help explain how to solve the problem and the steps that got you there as I need to learn how to be able to break down and solve these problems by myself but I am completely lost at the moment.
Thank you in advance
Petko is a corporation subject to 35% corporate tax rate and plans to main- tain a Debt-to-Asset ratio (D/A) equal to 0.5. There is a comparable firm to Petko; and this firm has been more conservative, maintaining Debt-to-Asset ratio in the neighborhood of 0.20. Using Ordinary Least Squares Regressions CFO has estimated the equity beta for the comparable firm to be 1.2. Based on its planned debt policy, CFO estimates that he will issue 10-year debt which will be priced at $940.56 (per face value of $1,000) and carry annual coupons of 5%. The risk-free rate is 4% and the historical average return on the market portfolio is 9%. It is believed that the debt beta of comparable firm is ZERO However, given the aggressive leverage policy of Petko, CFO believes that the debt beta for Petko is greater than zero. You also note that Petko's stock cur- rently trades at $20/share and the dividends/share in the most recent year were S1. Analysts expect that future dividends will grow at a rate of approximately 5% per year forever. You have been asked to estimate the WACC for Petko CFO wants to see the following pieces of information in conjunction with your WACC estimate a) (5 points) Debt-to-Equity Ratio (D/E) computed for the Comparable company AND Petko b) (5 points) Unlevered asset beta for the Comparable company, BA c) (5 points) Expected return on debt of Petko ro. You can ignore default risk in calculating the expected cost of debt. You can use Excel to find YTM of the bond d) (5 points) Debt beta for Petko (don't use rules of thumb -compute it) e) (5 points) Expected return TE on equity of Petko using CAPM f) (5 points) Expected return on equity of Petko using DCF growth model 8) (5 points) Weighted Average Cost of Capital for Petko (using E from e)Step by Step Solution
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