Fournier Industries, a publicly traded waste disposal company, is a highly lever

Question

Fournier Industries, a publicly traded waste disposal company, is a highly leveraged firm with 70% debt, 0% preferred stock, and 30% common equity financing. Current the risk-free rate is about 4.5%, and the return on the S&P 500 (the market proxy) is 12.7%. The firm's beta is currently estimated to be 1.65.

(a) What is Fournier's current cost of equity?

(b) If the firm shifts is capital sturcture to a less highly leveraged position by selling preferred stock and using the proceeds to retire debt, it expects its beta to drop to 1.20. What is its cost of equity in this case?

(c) If the firm shifts its capital strututure to a less highly leveraged position by selling additional shares of common stock and using the proceeds to retire debt, it expects it beta to drop to .95, What is its cost of equity in this case?

Please show work

Explanation / Answer

cost of equity = Risk free rate + Beta * (Return on market - Risk free rate)

Answer to A)

Ke = 4.5 + 1.65 (12.7-4.5) = 18.03 %

Answer to B)

Ke = 4.5 + 1.2 (12.7 - 4.5 ) = 14.34 %

Answer to C)

Ke = 4.5 + 0.95 (12.7 - 4.5 ) = 12.29 %

Related Questions

Navigate

• Browse (All)
• Browse F
• Subjects

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