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
Degger [83]
3 years ago
9

Biden Resorts Company currently has 0.2 million common shares of stock outstanding and the stock has a beta of 2.2. It also has

$1 million face value of bonds that have five years remaining to maturity and 8 percent coupon with semi-annual payments, and are priced to yield 13.65 percent. If Biden issues up to $2.5 million of new bonds, the bonds will be priced at par and have a yield of 13.65 percent; if it issues bonds beyond $2.5 million, the expected yield on the entire issuance will be 16 percent. Biden has learned that it can issue new common stock at $10 a share. The current
risk-free rate of interest is 3 percent and the expected market return is 10 percent. Biden's marginal tax rate is 30 percent. If Biden raises $7.5 million of new capital while maintaining the same debtto-equity ratio, its weighted average cost of capital is?
Business
1 answer:
frutty [35]3 years ago
8 0

Answer:

Hence, the weighted average cost of capital is 15.87%.

Explanation:

We have to find current weights,  

Value of equity = Shares x Share price = 0.2 x 10 = $2 million  

Face Value of Bonds FV = $1 million

Semi annual coupon P = 1 x 8% / 2 = $0.04 million

Number of coupons remaining n = 5 x 2 = 10

Semi annual yield r = 13.65% / 2 = 6.825%

Value of Debt = Px [1 - (1 + r)-n] / r + FV / (1 + r)n

= 0.04 x [1 - (1 + 0.06825)-10] / 0.06825 + 1 / (1 + 0.06825)10

= $0.8 million

Total Value = 2 + 0.8 = $2.8 million

Weight of Debt = 0.8 / 2.8 = 28.57%

Weight of Equity = 2 / 2.8 = 71.45%

Amount of Debt to be raised = Weight of debt x Capital

= 0.2857 x 7.5

= $2.14 million

Since the amount of debt to be raised is less than $2.5 million, the yield will be 13.65%  

Cost of Equity = Risk Free Rate + Beta x (Market Return - Risk Free Rate)

= 3% + 2.2 x (10 - 3)

= 18.4%

The weighted average cost of capital:-  

WACC = Weight of Debt x Cost of Debt x (1 -Tax Rate) + Weight of Equity x Cost of Equity

= 0.2857 x 13.65% x (1 - 0.3) + 0.7145 x 18.4%

= 15.87%

You might be interested in
Marshall's & Co. purchased a corner lot in Eglon City five years ago at a cost of $640,000. The lot was recently appraised a
Gala2k [10]

Answer:

$1,780,000

Explanation:

The computation of the initial cash flow for this building project is shown below:

= Estimated building cost + appraised cost of the lot

= $1,110,000 + $670,000

= $1,780,000

Simply we added the estimated building cost and the appraised cost of the lot so that the initial cash flow amount can come.

All other information which is given is not relevant. Hence, ignored it

3 0
3 years ago
True or False: Caffeine and other energy boosters can be used to effectively compensate for fatigue.
seropon [69]
True caffeine and other energy boosters can be used to effectively compensate for fatigue.
8 0
3 years ago
Read 2 more answers
Bonita Realty Management Co. received a check for $32,400 on August 1, which represents a one year advance payment of rent on an
ludmilkaskok [199]

Answer:

Explanation:

The adjusted journal entry is shown below:

Unearned rent revenue A/c Dr

      To Rent revenue A/c

(Being the adjusted entry of rent is recorded)

The computation of the rent revenue is shown below:

= Received amount × number of months ÷ (total number of months in a year)

= $32,400 × (5 months ÷ 12 months)

= $13,500

The 5 months is calculated from August 1 to December 31

3 0
3 years ago
Advertising sales agents typically work under the direct supervision of a manager or supervisor.
wolverine [178]

Advertising sales agents typically work under the direct supervision of a manager or supervisor. True.

Initally, an advertising sales agent works under the direct supervision of a manager or supervisor. They are trained and coached by those who are experienced in the field. Once the sales agent has completed a set amount of hours (based on different agency requirements) they are no longer required to complete check-ins as often. These sales agents are then on their own most of the time by setting their own hours for work as long as they meet company goals.

4 0
3 years ago
Every morning, peter goes to one of the nearby convenience stores and buys a carton of levin's chocolate milk for breakfast. whe
Nady [450]

Answer:

a. brand loyalty

Explanation:

  • As Peter goes to the nearby shop every day and buys the same brand carton of levins chocolate milk for breakfast this shows that the peters are a brand loyal customers as he goes without the milk if not buying the popular brand.
5 0
3 years ago
Other questions:
  • The University of Dover and Dover University are bitter cross town rivals. They compete in everything from sports to academics.
    5·1 answer
  • Johns Company manufactures products R, S, and T from a joint process. The following information is available: Product R S T Tota
    7·1 answer
  • Melissa has an old car that is desperately in need of expensive repairs. she is trying to decide whether to spend the $1,500 she
    6·1 answer
  • Coach valentine does not think that his team is playing up to its full potential. to increase the performance of the team, the c
    6·1 answer
  • Suppose you have $19 to spend. pepsi costs $1 per can, and pizza costs $2 per slice. given the marginal utilities shown, what co
    5·1 answer
  • Which of the following would an economist classify as capital? Group of answer choices lawyer's computer. $50 bill. 100 shares o
    6·1 answer
  • Which accounting principle states that a company should "report expenses in the same period as the revenue they help generate"?
    7·1 answer
  • At the end of the current period, Maltese, Inc. reports the following amounts: Assets = $52,300; Liabilities = $21,100; Dividend
    9·1 answer
  • Preferred stock has characteristics of both debt and common stock. Which characteristics of preferred stock resemble that of com
    8·1 answer
  • What is structurally different between starch and cellulose that gives them different physical properties?.
    13·1 answer
Add answer
Login
Not registered? Fast signup
Signup
Login Signup
Ask question!