Question
Need help with questions 5 and 6 Prompt: After reviewing the data in the table, respond to the problems below. Indicate the answer you believe
Need help with questions 5 and 6
Prompt: After reviewing the data in the table, respond to the problems below. Indicate the answer you believe is correct.
Zonk Corporation Data
Total assets | $7,460 |
Interest-bearing debt | $3,652 |
Average pretax borrowing cost | 10.5% |
Common equity: | |
Book value | $2,950 |
Market value | $13,685 |
Income tax rate | 35% |
Market equity beta | 1.13 |
Question 1: Assuming that the riskless rate is 2.3% and the market premium is 5.3%, calculate Zonks cost of equity capital:
D. 8.28%
Question 2: Determine the weight on debt capital that should be used to calculate Zonks weighted-average cost of capital:
B. 21%
Question 3: Determine the weight on equity capital that should be used to calculate Zonks weighted-average cost of capital:
A. 79%
Question 4: Using the above information, calculate Zonks weighted-average cost of capital:
B. 7.97%
Question 5: 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.
Question 6: 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 weighted average cost of capital for Zonk based on the new capital structure.
A. 8.85%
B. 12.56%
C. 13.01%
D. 9.94%
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started