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The XYZ Corporation has the following capital structure and rates of return: Debt (D) = $300m, Common stock (E) = $1,200m, Total Assets (V) =
The XYZ Corporation has the following capital structure and rates of return: Debt (D) = $300m, Common stock (E) = $1,200m, Total Assets (V) = $1,500m, rdebt = 8%, requity = 10% and tax rate = 40%. The Debt and the Common stock represent the market value of investment in the firm for the debt holders and stockholders. [Note: Show detail computations and use two decimal points for percentage (or numeric) in computations and answers.] (a) (3%) What are the i) DN & E/V ratios and ii) after-tax rdebt? (b) (4%) What are the firm's i) before-tax WACC and ii) after-tax WACC? (c) (3%) If the market return (rm) is 12% and the risk-free rate (rf) is 4%, what is the beta of the firm? (d) (5%) Suppose the firm is able to generate a stream of annual total cash flow for forever (perpetuity). If the first year cash flow (CF1) is $91m and this stream of annual total cash flow is growing at a constant growth rate of g after year 1, what is g? (Hint: the Common stock value represents the market value of stockholders.)
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