Question 10 ABC has an unlevered cost of capital (Ra) of 13.2%, a cost of debt o

Question

Question 10

ABC has an unlevered cost of capital (Ra) of 13.2%, a cost of debt of 8.6%and a tax rate of 0%. What is the cost of equity for a firm (Rs) with a weight of debt of 68%?

Enter you answer in percentages rounded off to two decimal points.

Question 11

ABC Stores is an all-equity firm with 30,000 shares outstanding. The value of each share is $25. The firm is issuing $20,000 of debt and using the proceeds to reduce the number of outstanding shares. How many shares of stock will be outstanding once the debt is issued? Ignore taxes.

Question 12

ABC Stores is an all-equity firm that has 20,000 shares of stock outstanding. The price per share is $20. The firm is considering borrowing funds at 8 percent interest and using the proceeds to repurchase 7,000 shares of stock. Ignore taxes. How much is the firm's borrowing?

Explanation / Answer

QUESTION 10

Let the Cost of Equity be x.

We know that total Cost of capital is equivalent (Cost of Equity + Cost of Debt) to 100%

Since weight of debt is given as 68%,

Therefore Weight of Equity should be = (100% - 68%) i.e. 32%

So putting Equation of cost of capital we have

Cost of Capital = (Cost of Equity * Weight of Equity) + (Cost of Debt after tax * Weight of Debt)

13.2% = (X * 0.32) + (8.6% * 0.68)

0.32X = 13.2 - 5.85

X = 22.98%

QUESTION 11

Amount collected from issue of Debt = $20,000

Value of each share = $25

So, Number of share can be purchased = ($20,000 / $25) i.e. 800 Shares

No of Shares Outstanding after issue = Total shares - Purchased back

No of Shares Outstanding after issue = (30,000 - 800) i.e. 29,200 shares.

Hence the Answer will be A. 29,200 Shares

QUESTION 12

So the firms want to purchase 7000 shares

Cost of Each shares = $20

Hence he will have to borrow = (7000 * $20) i.e. $140,000

Answer will be E. $140,000

As per chegg policy we can answer only 1 question at a time, going out of box i have answered all the question of yours. Please like my answer and thumps up if you find it helpful and feel free to comment any doubt if you have. Thank you, have great day.

Related Questions

Navigate

• Browse (All)
• Browse Q
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.