question archive The XY Corporation has the following capital structure and rates of return Debt (D) - $400m, Common stock (2) = $1
The XY Corporation has the following capital structure and rates of return Debt (D) - $400m, Common stock (2) = $1
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The XY Corporation has the following capital structure and rates of return Debt (D) - $400m, Common stock (2) = $1.200m Total Assets (1) - $1,600m.-8.auty 10% and that 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.) w What are the DIV & EN ratios and after tax out? blo What are the fa before-tax WACC and 1) after tax WACC) fact the market return is 12% and the risk-free rate is what is the beta of the firm? d) (590 Suppose the firm is able to generate a stream of annual total cash flow for forever (perpetuity. If the first year cash flow (CF) is $9im and this stream of annual total cash flow is growing at a constant growth rate of g after year 1, what is 97 (Hint: the common stock value represents the market value of stockholders.)
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Answer:
a) D/V = 400/1600 = 25%
E/V = 1200/1600 = 75%
After tax r(debt) = r(debt) * (1 - T) = 8% * (1 - 0.4) = 4.8%
b) Before tax WACC = (D/V)*r(debt) + (E/V)*r(equity)
= (0.25)(0.08) + (0.75)(0.1)
= 9.5%
After tax WACC = (D/V)*r(debt)*(1 - T) + (E/V)*r(equity)
= (0.25)(0.08)(1 - 0.4) + (0.75)(0.1)
= 8.7%
c) According to CAPM,
Cost of equity = Rf + Beta(Rm - Rf)
Rf = 4%, Rm = 12%
Cost of equity = 10%
10 = 4 + Beta(12 - 4)
Beta = 6/8 = 0.75
d) Market value of stockholders = CF1 / (After tax WACC - g)
1200 = 91/(0.087 - g)
0.087 - g = 0.0758
g = 0.011 or 1.1%
