MBA 520 Module Eight Activity Worksheet Prompt: After reviewing the data in the
ID: 2813675 • Letter: M
Question
MBA 520 Module Eight Activity Worksheet
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 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
Question 5
Levered market equity beta = unlevered market equity beta (1 + (1-t) [MV debtMV equity])
Levered market equity beta=1.13*(1+(1-.35)[.70/.30]= 4.35
Question 6:
market premium is 7.3%
riskless rate =4.6%
cost of equity =Rf+beta*(4.6%)
cost of equity capital = 046+1.13(.073)=8.28%
New WACC = [70%*14%*(1-.35)]+(30%*.0828)=8.85%
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