QUESTION 51 1. The following information applies to the next 4 questions. The cu
ID: 1176148 • Letter: Q
Question
QUESTION 51 1. The following information applies to the next 4 questions. The current market rate of return, E(RM) is 12% and the risk-free rate, RF is 4% You have been given job of determining your firm's cost of capital components. The company has 100,000 shares outstanding with a current market value of $60 per share The debt represents 25% of the capital structure in market value and the yield to maturity is 8%. The beta of the equity is 12,and the tax rate is 30% 2 What is the market value of the firm's debt? $1mil C $1.25 mil $1.5 mil $1.75 mil $2mil 1 points QUESTION 52 1. What is the required rate of returm on equity? 13.6% ? 14.4% 15.296 15.8% 16.4% QUESTION 53 1. What is the after-tax cost of debt? C 4.8% 5.0% 5.8% ? 7.4% , 8.0% l points QUESTION 54 1. What is the firm's WACC? 10.5% 11.6% r 12.75% 13.0% 13.25% ?Explanation / Answer
QUESTION 51 :Market value of equity = 100,000*60 = 6,000,000
So this prepresents 75% of the capital . So total capital = 6,000,000/0.75 = 8,000,000
Market value of debt = 8,000,000 -6,000,000 = 2,000,000 = 2 Million (Option E)
QUESTION 52: required rate of retun on equity = rf + beta*(rm-rf) = 4 + 1.2*(12-4) = 13.6% (Option A)
QUESTION 53: After tax cost of debt = yield to maturity*(1-tax rate) = 8%*(1-0.3) = 5.6% (Option B)
QUESTION 54: WACC = 0.75*13.6 +0.25*5.6 = 11.6% (Option B)