Prompt: After reviewing the data in the table, respond to the problems below. In
ID: 2813558 • Letter: P
Question
Prompt: After reviewing the data in the table, respond to the problems below. Indicate the answer you believe is correct.
Zonk Corporation Data
Total assets
$7,460
Interest-bearing debt
$3,652
Average pretax borrowing cost
10.5%
Common equity:
Book value
$2,950
Market value
$13,685
Income tax rate
35%
Market equity beta
1.13
Question 1: Assuming that the riskless rate is 2.3% and the market premium is 5.3%, calculate Zonk’s cost of equity capital:
A. 10.4%
B. 7.69%
C. 11.89%
D. 8.28%
Question 2: Determine the weight on debt capital that should be used to calculate Zonk’s weighted-average cost of capital:
A. 21.7%
B. 21%
C. 50%
D. 58.2%
Question 3: Determine the weight on equity capital that should be used to calculate Zonk’s weighted-average cost of capital:
A. 79%
B. 78.3%
C. 41.8%
D. 50%
Question 4: Using the above information, calculate Zonk’s weighted-average cost of capital:
A. 11.5%
B. 7.97%
C. 7.48%
D. 10.90%
Question 5: Assume that Zonk is a potential leveraged buyout candidate. Assume that the buyer intends to put in place a capital structure that has 70 percent debt with a pretax borrowing cost of 14 percent and 30 percent common equity. Compute the revised equity beta for Zonk based on the new capital structure.
A. 4.35
B. 4.77
C. 4.34
D. 3.91
Question 6: Assume that Zonk is a potential leveraged buyout candidate. Assume that the buyer intends to put in place a capital structure that has 70 percent debt with a pretax borrowing cost of 14 percent and 30 percent common equity. Compute the weighted average cost of capital for Zonk based on the new capital structure.
A. 8.85%
B. 12.56%
C. 13.01%
D. 9.94%
Total assets
$7,460
Interest-bearing debt
$3,652
Average pretax borrowing cost
10.5%
Common equity:
Book value
$2,950
Market value
$13,685
Income tax rate
35%
Market equity beta
1.13
Explanation / Answer
As per Chegg Policy I have answered first 4 question. For other question please raise new request. Total Asset $7,460 Interest-bearing debt $3,652 Average pretax borrowing cost 10.50% Common equity: Book value $2,950 Market value $13,685 Income tax rate 35% Market equity beta 1.13 Answer 1) Risk free rate 2.30% market premium 5.30% cost of equity capital using CAPM = Risk free rate + Market premium*Beta =2.3%+5.3%*1.13 8.28% Hence, correct answer is Option - D 8.28% Answer 2) Weight on debt = total debt/(Total equity+ total debt) i Debt = interest bearing bebt $3,652 ii Equity = $13,685 iii=i+ii Total $17,337 iv Weight of debt = i/iii 21% Hence, correct answer is Option - B 21% Answer 3) Weight on equity = total equity/(Total equity+ total debt) OR 1- weight on debt Weight on equity = 1-0.21 = 79% Hence, correct answer is Option - A 79% Answer 4) weighted-average cost of capital = Weight of equity*Cost of equity+ Weight of debt *cost of debt Weight of equity = 79% Cost of equity= 8.3% Weight of debt = 21% Cost of debt (Refer note)= 6.8% WACC= =79%*8.3%+21%*6.8% 7.97% Hence, Correct answer is option : B 7.97% Note : Post tax cost of debt = =10.5%*(1-0.35) 6.8%
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