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Reika [66]
3 years ago
7

Trendsetters has a cost of equity of 14.6 percent. the market risk premium is 8.4 percent and the risk-free rate is 3.9 percent.

the company is acquiring a competitor, which will increase the company's beta to 1.4. what effect, if any, will the acquisition have on the firm's cost of equity capital?
Business
1 answer:
BabaBlast [244]3 years ago
4 0
Given:
<span>cost of equity of 14.6 percent
</span><span>market risk premium is 8.4 percent
</span><span>risk-free rate is 3.9 percent
</span><span>increase company's beta to 1.4 after purchase.

We will use the CAPM or Capital Asset Pricing Model formula to solve the new cost of equity.

</span>

Re = rf + (rm – rf) * β 

Where:

<span>Re = the required rate of return on equity
<span>rf = the risk free rate
</span><span>rm – rf = the market risk premium
</span>β = beta coefficient = unsystematic risk</span><span>

</span>We need to solve for the original beta coefficient using the given cost of equity, market risk premium and risk free rate.

Re = rf + (rm – rf) * β<span> 
14.6% = 3.9% + 8.4% * </span>β
14.6% - 3.9% = 8.4% * β
10.7% / 8.4% = β
1.27 = β
<span>
The initial beta coefficient is 1.27. 

Using the same risk free rate, market risk premium, and a new beta coefficient of 1.4, we need to solve the cost of equity.

</span>Re = 3.9% + 8.4% * 1.4
Re = 3.9% + 11.76%
Re = 15.66% 

The new cost of equity after purchasing a company is 15.66%. It increase from 14.6% by 1.06%.

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Answer:

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<u>EQUITY</u>

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Common stock - Issued             $ 8,743

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Total Equity                                $114,119

Explanation:

The the stockholders’ equity section of the balance sheet shows the amount of capital invested by the shareholders in the business as well as the reserves that have been allocated to them.

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3 years ago
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Step2247 [10]

Answer and Explanation:

The Journal entries are shown below:-

1. Right of use assets Dr, $371,049

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(Being lease is recorded)

Working note:-

Present value of periodic lease payment $354,595

($100,000 × (present value of ordinary annuity of $1, n = 4, i = 5%)

($100,000 × 3.54595)

Present value of an estimated cash payment under a residual value

$16,454 (Present value $1, n = 4, i = 5%)

Lease payment = $354,595 + $16,454

= $371,049

2. Amortization expense Dr, ($371,049 ÷ 4 years) $97,262

             To Right of use assets $97,262

(Being related to the lease is recorded)

3. Interest expense Dr, (5% × $371,049) $18,552

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3 years ago
The required return on the stock of Moe's Pizza is 10.8 percent and aftertax required return on the company's debt is 3.40 perce
garik1379 [7]

Answer:

The required return for the new project is 6.87%

Explanation:

In order to calculate the required return for the new project we would have to calculate the Weighted Average Cost of Capital (WACC) adjusted by risk adjustment factor .

The Weighted Average Cost of Capital (WACC) = [After Tax Cost of Debt x Weight of Debt] + [Cost of equity x Weight of Equity]

After -tax Cost of Debt = 3.40%

Cost of Equity = 10.80%

Weight of Debt = 0.39

Weight of Equity = 0.69

Therefore, the Weighted Average Cost of Capital (WACC) = [After Tax Cost of Debt x Weight of Debt] + [Cost of equity x Weight of Equity]

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8 0
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The performance report details the following:

  • Calculates the difference between actual and budgeted expenditure and revenue.
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Learn more about performance reports and variances at brainly.com/question/13287252

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