Question
Solve the following problems below. Encode your answers with no words, no spaces, no commas, final answers should be ROUNDED OFF TO 2 DECIMAL PLACES
Solve the following problems below. Encode your answers with no words, no spaces, no commas, final answers should be ROUNDED OFF TO 2 DECIMAL PLACES for percentages, amounts, units or beta. ATTACHMENT OF SOLUTIONS ARE REQUIRED. BOTH THE FORM ANSWERS AND THE SOLUTION SHEET MUST BE THE SAME OR ELSE IT WILL BE WRONG.
5. Wintermelon Corp.'s controller is considering a change in the capital structure consisting of 40% debt and 60% equity. Initially, Winter Melon Corp.'s tax rate is 40%, its beta is 2.5, and it has no debt. The risk-free rate is 3.0 percent and the market risk premium is 7.0 percent. What is the beta if the company did not resort to debt financing?
6. Part 2 (Continuation) Sayote Corporation is considering changing its capital structure in order to lower its cost of capital and raise firm value. Sayote currently has a capital structure that is 20 percent debt and 80 percent equity based on market values. (It has a D/E ratio of 0.25.) The risk-free rate is 7%, and the business risk premium is 5%. The company's current cost of equity, calculated using the CAPM, is 14%, and its tax rate is 35%. What will Sayote's estimated cost of equity be if it changed its capital structure to 50% debt and 50% equity? Compute for the new levered beta using the new capital structure.(Hint: Find the firm's new cost of equity given the new levered beta)
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