1answer.
Ask question
Login Signup
Ask question
All categories
  • English
  • Mathematics
  • Social Studies
  • Business
  • History
  • Health
  • Geography
  • Biology
  • Physics
  • Chemistry
  • Computers and Technology
  • Arts
  • World Languages
  • Spanish
  • French
  • German
  • Advanced Placement (AP)
  • SAT
  • Medicine
  • Law
  • Engineering
dmitriy555 [2]
2 years ago
5

Simon Software Co. is trying to estimate its optimal capital structure. Right now, Simon has a capital structure that consists o

f 20% debt and 80% equity, based on market values. (Its D/S ratio is 0.25.) The risk-free rate is 6% and the market risk premium, rM – rRF, is 5%. Currently the company’s cost of equity, which is based on the CAPM, is 12% and its tax rate is 40%. What would be Simon’s estimated cost of equity if it were to change its capital structure to 50% debt and 50% equity?
Business
1 answer:
lidiya [134]2 years ago
3 0

Answer:

14.35%

Explanation:

Simon Software Co

rs= 12%

D/E = 0.25

rRF= 6%

RPM= 5%

Tax rate = 40%.

We are going to find the firm’s current levered beta by using the CAPM formula which is :

rs = rRF+ RPM

12%= 6% + 5%

= 1.2

We are going to find the firm’s unlevered beta by using the Hamada equation:

=bU[1 + (1 −T)(D/E)]

Let plug in the formula

1.2= bU[1 + (0.6)(0.25)]

1.2=(1+0.15)

1.2= 1.15bU

1.2÷1.15

1.0435= bU

We are going to find the new levered beta not the new capital structure using the Hamada equation:

b= bU[1 + (1 −T)(D/E)]

Let plug in the formula

= 1.0435[1 + (0.6)(1)]

=1.0435(1+0.6)

=1.0435(1.6)

= 1.6696

Lastly we are going to find the firm’s new cost of equity given its new beta and the CAPM:

rs= rRF+ RPM(b)

Let plug in the formula

= 6% + 5%(1.6696)

= 14.35%

You might be interested in
Rebotar Inc. makes basketballs. Their fixed costs are $3,450. Variable costs are $12 per basketball. If the basketball is priced
JulsSmile [24]

Answer:

yes

Explanation:

The contribution margin concept uses the formula below to calculate the break-even point.

break-even = fixed cost/ contribution margin per unit

fixed costs = $3,450.

contribution margin per unit = sales price - variable costs

= $25- $12

=$13

Break-even = $3,450 /$13

=265.38

=265 units

The break-even point is 265 units. Rebotar Inc. sold 300 basketballs; they meet the break-even point. 300 basketballs are more than 265.

8 0
2 years ago
Whirly Corporation’s contribution format income statement for the most recent month is shown below: Total Per Unit Sales (10,000
ivann1987 [24]

Answer:

See explanation section.

Explanation:

Requirement 1

New sales volume after increasing 100 units = (10,000 + 100) = 10,100 units. The revised net operating income is calculated as follows

                           Whirly Corporation’s

               Contribution format income statement

               For the year ended December 31 20YY

Sales Revenue (10,100 × 35) = 353,500 (Note - 1)

Less: Variable expense (10,100 × 20) = 202,000 (Note - 2)

Contribution Margin = $151,500

Less: Fixed Expense  $135,000

Net Operating Income $16,500

Note 1: Sale price per unit $350,000 ÷ 10,000 = $35

Note 2: Variable expense per unit $200,000 ÷ 10,000 = $20

Requirement 2

From requirement 1 we get,

Sale price per unit = $35

Variable expense per unit = $20

New sales volume after decreasing 100 units = (10,000 - 100) = 9,900 units. The revised net operating income is calculated as follows

                            Whirly Corporation’s

               Contribution format income statement

               For the year ended December 31 20YY

Sales Revenue (9,900 × 35) = 346,500

Less: Variable expense (9,900 × 20) = 198,000

Contribution Margin = $148,500

Less: Fixed Expense  $135,000

Net Operating Income $13,500

Requirement 3

From requirement 1 we get

Sale price per unit = $35

Variable expense per unit = $20

If the sales volume is 9,000 units, the revised net operating income is calculated as follows

                         Whirly Corporation’s

               Contribution format income statement

               For the year ended December 31 20YY

Sales Revenue (9,000 × 35) = $315,000

Less: Variable expense (9,000 × 20) = $180,000

Contribution Margin = $135,000

Less: Fixed Expense  $135,000

Net Operating Income           $0

If the company sells 9000 units, there will be no loss, no profit.

8 0
2 years ago
Wind Power Systems has semi-annual bonds outstanding with a 5 percent coupon that will mature in 20 years. The face amount of ea
Mashcka [7]

Answer:

the pre tax cost of debt is 3.98%

Explanation:

The computation of the pre tax cost of debt is shown below;

Pre tax cost of debt is

= (Annual interest + (par value - market price) ÷ (number of years) ÷ (par value + market price) ÷ 2

= (0.05) + ($1,000 - $1,140) ÷ (20) ÷ ($1,000 + $1,140) ÷ 2

= 3.98%

Hence, the pre tax cost of debt is 3.98%

We simply applied the above formula so that the correct value could come

And, the same is to be considered

5 0
2 years ago
Quinn has job offers in Wrexington and across the country in Charlieville. The Wrexington job would pay a salary of $50,000 per
vovikov84 [41]

Answer:

c. $66,666.67.

Explanation:

Provided that

Wrexington job paying a salary for $50,000 per year

Charlieville job paying a salary for $40,000 per year

The CPI in Wrexington is 150

The CPI in Charlieville is 90

So, by considering the above information, the Charlieville salary in Wrexington dollars is  

= Charlieville job paying a salary ×  CPI in Wrexington ÷ CPI in Charlieville

= $40,000 × 150 ÷ 90

= $66,666.67

6 0
3 years ago
Rod is looking for professional financial assistance. Rod has a solid grasp of how investing works, but needs a way to handle th
navik [9.2K]
Based on the given scenario above, I believe that the answer would be option D. INVESTMENT ADVISOR. Since based on the situation above about Rod wherein he wants to know how investment works, and how stocks works, the <span>appropriate financial professional for him would be an investment advisor. Hope this helps.</span>
4 0
3 years ago
Read 2 more answers
Other questions:
  • What is the main reason for establishing an organizational structure
    8·1 answer
  • The Marketing Department thinks that a fancy new package for the laptop computer battery would grow sales. The new package would
    10·1 answer
  • Drag the tiles to the correct boxes to complete the pairs. Match the different types of communications with their descriptions.
    5·1 answer
  • The economic freedom of the world measure indicates that the united states
    15·1 answer
  • Which statement is true?
    7·1 answer
  • In the block style business letter, the inside address appears below the date, with one blank _______ in between.
    5·1 answer
  • A rent control law, where tenants pay below-market rents, is a market restriction that may induce a decrease in the supply of re
    5·1 answer
  • Select the correct answer.
    8·1 answer
  • Why should we hire you? Is this a behavioral, situational,&amp;/or job knowledge/worker requirement interview question
    13·1 answer
  • Which of the following is NOT part of value-chain analysis? (a) product research (b) quality management (c) supply chain managem
    12·1 answer
Add answer
Login
Not registered? Fast signup
Signup
Login Signup
Ask question!