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3Practice - equity companies(i.e unlevered but here is the...

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321 Optional Practice Questions Class 14 Practice Question #1 Delta Corp. has a current capitalization of $1 million with a debt-to-equity ratio of .55 and an ROA of 13%. Their interest payment on their current debt is $17,740 per year and they have a 40% corporate tax rate. a. What is Delta’s current weighted average cost of capital? b. If Delta needs to expand at a cost of $500,000 and funds the expansion with bonds at 8% interest (current 1-year T-bills are yielding 5%), what is their new WACC? Practice Question #2 The North Pole Fishing Co. and the South Pole Fishing Co. would have identical equity betas of 1.25 if both were all
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Unformatted text preview: equity companies (i.e. unlevered), but here is the capitalization information for each company: North Pole South Pole Debt $1,400,000 $2,600,000 Equity $2,600,000 $1,400,000 The expected return on a market portfolio is 12.40%, and the risk-free rate is 5.30%. Both companies are subject to a corporate tax of 35%. Assume the beta of the debt is zero. a. What is the equity beta of each of the two companies? b. What is the required rate of return on each company’s equity?...
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