QUESTION 7 A large industrial company has in recent years on average paid taxes worth 16% of its Earnings Before Taxes, but it is subject the current tax bracket of 21% on every dollar of additional earnings that it generates. The company is only financed with these two financial claims: 40 million bonds outstanding with $1,000 par value each, 4.2% coupons paid semiannually. 14 years to maturity, high investment grade rating, a quoted yield of 3.3%, and selling currently for 110.0% of par 200 million shares of common stock selling for $370 per share with a 0.9 beta and 60% volatility In financial markets, the current risk-free interest rate is 1%, and equity investors expect a 4% market risk premium over safe investments. a) What is the weight of the debt in the company's current capital structure? ENTER YOUR ANSWER IN ONLY THREE DECIMALS. AND NOT IN PERCENT. For example, if your answer is 42.4% debt, then type in this: 424 b) What is the company's current after-tax cost of debt. ENTER YOUR ANSWER IN PERCENT. For example, if your answer is 8.52%, then type in this: 8.52 without the percent sign. c) What is the expected return that equity investors currently require to invest in shares of this company? ENTER YOUR ANSWER IN PERCENT. For example, if your answer is 3.53%. then type in this: 3.53 without the percent sign. d) INSTEAD OF USING YOUR PREVIOUS ANSWERS IN parts a-c above: The company targets 40% debt financing in its capital structure with the remaining in common stock. The CFO believes that the (pre-tax) cost of the company's debt financing is 4% and that investors require an 8% return to buy its stock. The marginal tax rate is 21%. What is her estimate of the firm's overall WACC? ENTER YOUR ANSWER IN PERCENT. For example, if your answer is 13.25%, then type in this: 13.25 without the percent sign. QUESTION 7 A large industrial company has in recent years on average paid taxes worth 16% of its Earnings Before Taxes, but it is subject the current tax bracket of 21% on every dollar of additional earnings that it generates. The company is only financed with these two financial claims: 40 million bonds outstanding with $1,000 par value each, 4.2% coupons paid semiannually. 14 years to maturity, high investment grade rating, a quoted yield of 3.3%, and selling currently for 110.0% of par 200 million shares of common stock selling for $370 per share with a 0.9 beta and 60% volatility In financial markets, the current risk-free interest rate is 1%, and equity investors expect a 4% market risk premium over safe investments. a) What is the weight of the debt in the company's current capital structure? ENTER YOUR ANSWER IN ONLY THREE DECIMALS. AND NOT IN PERCENT. For example, if your answer is 42.4% debt, then type in this: 424 b) What is the company's current after-tax cost of debt. ENTER YOUR ANSWER IN PERCENT. For example, if your answer is 8.52%, then type in this: 8.52 without the percent sign. c) What is the expected return that equity investors currently require to invest in shares of this company? ENTER YOUR ANSWER IN PERCENT. For example, if your answer is 3.53%. then type in this: 3.53 without the percent sign. d) INSTEAD OF USING YOUR PREVIOUS ANSWERS IN parts a-c above: The company targets 40% debt financing in its capital structure with the remaining in common stock. The CFO believes that the (pre-tax) cost of the company's debt financing is 4% and that investors require an 8% return to buy its stock. The marginal tax rate is 21%. What is her estimate of the firm's overall WACC? ENTER YOUR ANSWER IN PERCENT. For example, if your answer is 13.25%, then type in this: 13.25 without the percent sign
