Blitz Industries has a debt-equity ratio of .6. Its WACC is 9.1 percent, and its cost of debt is 6.4 percent. The corporate tax rate is 22 percent. a. What is the company's cost of equity capital? b. What is the company's unlevered cost of equity capital? c-1. What would the cost of equity be if the debt-equity ratio were 2?c-2. What would the cost of equity be if the debt-equity ratio were 1.0?c-3. What would the cost of equity be if the debt-equity ratio were zero?

Answer: a. WACC = Ke(E/V} + kd(D/V)(1-T)

9.1 = ke(100/160) + 6.4(60/160)(1-0.22)

9.1 = ke(0.625) + 2.4(0.78)

9.1 = 0.625ke + 1.872

9.1-1.872 = 0.625ke

7.228 = 0.625ke

ke = 7.228/0.625

ke = 11.56%

b. WACC = Ke(E/V)

9.1   = ke(100/160)

9.1   = 0.625ke

ke = 9.1/0.625

ke = 14.56%

c-1.    WACC = Ke(E/V} + kd(D/V)(1-T)

9.1  = ke(1/3) + 6.4(2/3)(1-0.22)

9.1  = 0.3333ke + 3.328

9.1 - 3.328 = 0.3333ke

5.772   = 0.3333ke

ke = 5.772/0.3333

ke = 17.32%

c-2.     9.1 = ke(1/2) + 6.4(1/2)(1-0.22)

9.1 = 0.5ke   + 2.496

9.1 - 2.496 = 0.5ke

6.604 = 0.5ke

ke = 6.604/0.5

ke = 13.21%

c-3.  9.1 = ke (0/0) + kd (0/)

ke = 0%

Explanation:

a. in the a part of the question, the debt-equity ratio was 0.6 ie 60/100. Thus, the value of the firm equals 160. The figures given in the question were substituted in the formula. Cost of equity was not provided, therefore, it becomes the subject of the formula. The variables are defined as follows:

ke = Cost of equity = ?

kd = Cost of debt  = 6.4%

E = Value of equity = 100

D = Value of debt = 60

V = Value of the firm ie E + D = 100 + 60 = 160

T = Tax rate = 22% = 0.22

b. In this part of the question, only equity would be considered since we are calculating unlevered cost of equity. The part of the formula that deals with debt will be ignored.

c-1.  In this case, the debt-equity ratio is 2. Therefore, debt equals 2 while equity is 1. The value of the firm becomes 3. There is need to substitute these values in the original formula while other variables remain constant.

c-2. In this scenario, the debt-equity ratio is 1. Thus, equity is 1 and debt is also 1. The value of the company changes to 2. These new values would be substituted in the formula in order to obtain the new cost of equity.

c-3. since the debt-equity ratio is 0, therefore, the cost of equity equals 0.

a. The company's cost of equity capital is 8.6014%. b. The company's unlevered cost of equity capital is 5.8729%. c-1. If the debt-equity ratio were 2, the cost of equity would be 8.6788%. c-2. If the debt-equity ratio were 1.0, the cost of equity would be 8.8894%. c-3. If the debt-equity ratio were zero, the cost of equity would be 5.8729%.

Explanation:

a. The formula to calculate the cost of equity capital is: Cost of Equity = WACC - (Debt/Equity) * (WACC - Cost of Debt) * (1 - Tax Rate). So, by plugging in the given values, we get Cost of Equity = 9.1% - 0.6 * (9.1% - 6.4%) * (1 - 0.22) = 9.1% - 0.6 * 2.7% * 0.78 = 9.1% - 0.4986% = 8.6014%.

b. The unlevered cost of equity capital can be calculated using the formula: Unlevered Cost of Equity = Cost of Equity / (1 + (Debt/Equity) * (1 - Tax Rate)). So, by plugging in the given values, we get Unlevered Cost of Equity = 8.6014% / (1 + 0.6 * 0.78) = 8.6014% / 1.468 = 5.8729%.

c-1. If the debt-equity ratio were 2, the new cost of equity can be calculated using the same formula as in part a. By plugging in the new debt-equity ratio, we get Cost of Equity = 9.1% - 2 * (9.1% - 6.4%) * (1 - 0.22) = 9.1% - 2 * 2.7% * 0.78 = 9.1% - 0.4212% = 8.6788%.

c-2. If the debt-equity ratio were 1.0, the new cost of equity can be calculated using the same formula as in part a. By plugging in the new debt-equity ratio, we get Cost of Equity = 9.1% - 1.0 * (9.1% - 6.4%) * (1 - 0.22) = 9.1% - 1.0 * 2.7% * 0.78 = 9.1% - 0.2106% = 8.8894%.

c-3. If the debt-equity ratio were zero (meaning no debt), the new cost of equity would be the same as the unlevered cost of equity calculated in part b, which is 5.8729%.

brainly.com/question/33955975

#SPJ2

Related Questions

Consider the following simplified financial statements for the Wims Corporation (assuming no income taxes):Income Statement Balance Sheet
Sales \$38,000 Assets \$27,300 Debt \$6,700
Costs 32,600 Equity 20,600
Net income \$5,400 Total \$27,300 Total \$27,300

The company has predicted a sales increase of 20 percent. Assume the company pays out half of net income in the form of a cash dividend. Costs and assets vary with sales, but debt and equity do not.

a. Prepare the pro forma statements.
b. Determine the external financing needed.

a. Proforma income statement

Sales                    \$45,600

Costs                    \$39,120

Net income          \$6,480

b. Proforma balance sheet

Particulars           Amount           Liabilities               Amount

Assets                 \$32,760           Debt                       \$8,950

Equity                     \$23,810

Total                       \$32,760

External finance = Predicted debt - Beginning debt

= \$7,585 - \$6,700

= \$885

Working note:-

For pro forma statements:

Sales = \$38,000 × (1 + 0.20)

= \$38,000 × 1.20

= \$45,600

Costs = 32,600 × (1 + 0.20)

= \$32,600 × 1.20

= \$39,120

Net income = Sales - Costs

= \$45,600 – 39,120

= \$6,480

Assets = 27,300 × (1 + 0.20)

= 27,300 × 1.20

= \$32,760

Equity = Beginning balance + Net income - Dividend

= \$20,600 + \$6,480 - (\$6,480 × 1 ÷ 2)

= \$20,600 + \$6,480 - \$3,240

= \$23,810

Debt = Assets - Equity

= \$31,760 - \$23,810

= \$8,950

The pro forma statements are prepared by adjusting the sales, costs, and assets by the 20% increase. The net income and dividends are then calculated. The external financing needed is found by deducting the sum of debt, equity and retained earnings from the adjusted total assets.

Explanation:

The pro forma statements are prepared by first adjusting sales, costs, and assets by the predicted increase of 20%. The new sales amount would be \$38,000 * 1.20 = \$45,600. Costs increase at the same rate, so the new costs would be \$32,600 * 1.20 = \$39,120. The new assets would be \$27,300 * 1.20 = \$32,760.

On the pro forma income statement, the net income is calculated by subtracting the new costs from the new sales, which is \$45,600 - \$39,120 = \$6,480. The dividend would be \$6,480 * 0.50 = \$3,240. The retained earnings (AKA addition to retained earnings) increase by the net income minus the dividends, which is \$6,480 - \$3,240 = \$3,240.

On the pro forma balance sheet, the total assets increased to \$32,760. As debt and equity don't change, then they remain at \$6,700 and \$20,600 respectively. The sum of debt and equity added to the predicted retained earnings is \$6,700 + \$20,600 + \$3,240 = \$30,540. Therefore, the external financing needed is the new total assets minus this sum, which is \$32,760 - \$30,540 = \$2,220.

brainly.com/question/33974992

#SPJ3

Determining opportunity cost Juanita is deciding whether to buy a dress that she wants, as well as where to buy it. Three stores carry the same dress, but it is more convenient for Juanita to get to some stores than others. For example, she can go to her local store, located 15 minutes away from where she works, and pay a marked-up price of \$102 for the dress:
Store Travel Time Each Way Price of a Dress
(Minutes) (Dollars per dress)
Local Department Store 15 102
Across Town 30 87
Neighboring City 60 63
Juanita makes \$58 an hour at work. She has to take time off work to purchase her dress, so each hour away from work costs her \$58 in lost income. Assume that returning to work takes Juanita the same amount of time as getting to a store and that it takes her 30 minutes to shop. As you answer the following questions, ignore the cost of gasoline and depreciation of her car when traveling. Complete the following table by computing the opportunity cost of Juanita's time and the total cost of shopping at each location.
Store Opportunity Cost of Time Price of a Suit Total Cost
(Dollars) (Dollars per suit) (Dollars)
Local Department Store 103
Across Town 88
Neighboring City 63
Assume that Juanita takes opportunity costs and the price of the suit into consideration when she shops. Juanita will minimize the cost of the suit if she buys it from the:______. .

1. The opportunity cost and total cost table is shown in the attached image below. 2.  Juanita will minimize the cost of the dress if she buys it from the: Neighboring City.

The value of the next best alternative foregone when a decision is made to opt for resources like time, money, or effort to a certain option is known as opportunity cost. In other words, it is the cost of choosing one choice over another while considering the benefits and drawbacks of both options.

As there are only so many resources available, selecting one choice frequently implies forgoing its advantages. It's a manner of approaching decision-making that considers both the advantages and disadvantages of various options

brainly.com/question/29636685

#SPJ12

The complete question might be:

Determining opportunity cost Juanita is deciding whether to buy a dress that she wants, as well as where to buy it. Three stores carry the same dress, but it is more convenient for Juanita to get to some stores than others. For example, she can go to her local store, located 15 minutes away from where she works, and pay a marked-up price of \$103 for the dress: Juanita makes \$16 an hour at work. She has to take time off work to purchase her dress, so each hour away from work costs her \$16 in lost income. Assume that returning to work takes Juanita the same amount of time as getting to a store and that it takes her 30 minutes to shop. As you answer the following questions, ignore the cost of gasoline and depreciation of her car when traveling.

1.Complete the following table by computing the opportunity cost of Juanita's time and the total cost of shopping at each location.

2. Assume that Juanita takes opportunity costs and the price of the dress into consideration when she shops. Juanita will minimize the cost of the dress if she buys it from the :______.

Malaya Ramirez is organizing marketing research in Central American countries for a large American corporation that is interested in expanding its market. The survey Malaya is using was written in English and then translated into Spanish for use by Spanish-speaking respondents. Which of the following is it most important for Malaya do before administering this questionnaire to a sample of the market?A) make sure that the survey includes both open-ended and closed-ended questions
B) decide whether to focus on primary or secondary data
C) determine which type of research instrument to use
D) have the questionnaire translated back into English to check for accuracy
E) determine whether to focus on descriptive or causal objectives

The questionnaire was translated back into English to check for accuracy. Thus option D is correct.

What is the marketing research ?

Marketing research is the systematic gathering, recording, and analysis of the information that is qualitative and quantitative related to the marketing of products and services. It is the marketing of the business activities.

The research includes the B2B and B2C. The main objective is to provide relevant and accurate reliable information. The research relies on surveys and questionnaires as tools of gathering information.

The correct answer is letter "D": have the questionnaire translated back into English to check for accuracy.

Explanation:

Translating is the activity by which the message given in a language is provided written in a different language. However, all languages are not the same and during the translation, meaning can be lost. Besides, specific terminology could make the translation difficult for the translator.

Thus, for accuracy purposes Malaya Ramirez should have the English-Spanish translation checked, making it be translated back into English.

Lacy's Linen Mart uses the average cost retail method to estimate inventories. Data for the first six months of 2021 include: beginning inventory at cost and retail were \$64,500 and \$123,000, net purchases at cost and retail were \$315,000 and \$483,000, and sales during the first six months totaled \$493,000. The estimated inventory at June 30, 2021, would be:

Best estimate for inventory =\$70,764.85

Explanation:

The closing inventory value at retail

= (Opening inventory + Purchases - sales)  all in retail prices

= \$123,000 +  \$483,000 - 493,000.

= 113000

Closing inventory value at cost

=113,000 ×  (64,500 + 315,000)/(123,000 +  \$483,000)

=70,764.85

Best estimate for inventory =\$70,764.85

Nora is interested in a career in human resource management. She expected her first job to focus on giving employees access to information and enrollment forms for training, benefits, and other programs. However, she has since learned that HR employees spend less time doing that kind of work. Which trend is behind that change

employees can now get such information through self-service

Explanation:

The trend behind this change is that, employees can now get such information through self-service. Human resource Employees spend less time doing such work now because such information is readily available on the internet and can be accessed by any employee at anytime that they want to do so on their own.

Examine the experience of shopping online versus shopping in a traditional environment. Imagine that you have decided to purchase a digital camera (or any other item of your choosing). First, shop for the camera in a traditional manner. Describe how you would do so (for example, how you would gather the necessary information you would need to choose a particular item, what stores you would visit, how long it would take, prices, etc.). Next, shop for the item on the Web or via a mobile app. Compare and contrast your experiences. What were the advantages and disadvantages of each? Which did you prefer and why?

Shopping in a traditional manner

If I had to buy, let’s say an iPad, I would visit the official store. First of all, I would take a closer look at the product, revising it carefully, if it feels right and if it meets my needs. Then I would ask for the price if they have a discount or any sale upcoming or payment plan. If everything meets my requirements I would buy the item. On the other hand, if there weren’t any official stores around the place I live in, I would visit three different department stores, preferably where they have the product of my interest displayed, also I would ask about the price and/or payment plan or discounts and availability. I must mention that cost is an important aspect to make a decision on where to buy the item. All of this process would take about 1 or 2 days at most.

• -You can see, feel, check the product to dissipate any doubts, there are people willing to answer any question and help to make a better choice.
• Get the product at the same moment you are paying for it and if you want to you can use/wear it immediately.

• If they are out of stock of the item of your interest, there is a chance you will have to wait a long time for it, although it could happen the store won’t have the product available again.
• The offers are not as wide as on the web sites.

Shopping on the web or via a mobile app

It is almost the same as shopping in a traditional manner, the greater differences are that there are more virtual places/shops online to compare prices and availability and sometimes they have great offers, because of the competition. Generally, the items are cheaper than a department store.

This process could take about a week, especially if you are waiting for a specific offer.

• There are lots of options, lots of different online stores, that increase the chances to get a good offer or an item with better characteristics at the same price; if you don’t find availability in one web you can find it in another in no time.
• There is no need to leave your house or put on pause your busy schedule, as you will receive the item at your door.