The following data pertains to Zonk Corp., a manufacturer of ball bearings (doll
ID: 2638311 • Letter: T
Question
The following data pertains to Zonk Corp., a manufacturer of ball bearings (dollar amounts in millions):Total assets $7460
Interest-bearing debt $3652
Average pre-tax borrowing cost 10.5%
Common equity:
Book value $2950
Market value $13685
Income tax rate 35%
Market equity beta 1.13
Assuming that riskless rate is 4.6% and the market premium is 7.3% calculate Zonk's cost of equity capital: (Points : 2) 10.4%
7.69%
11.89%
8.28% Question 15.15. Determine the weight on debt capital that should be used to calculate Zonk's weighted-average cost of capital: (Points : 2) 21.7%
21.00%
50%
58.2% Question 16.16. 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. (Points : 2) 4.35
4.77
4.34
3.91 The following data pertains to Zonk Corp., a manufacturer of ball bearings (dollar amounts in millions):
Total assets $7460
Interest-bearing debt $3652
Average pre-tax borrowing cost 10.5%
Common equity:
Book value $2950
Market value $13685
Income tax rate 35%
Market equity beta 1.13
Assuming that riskless rate is 4.6% and the market premium is 7.3% calculate Zonk's cost of equity capital: (Points : 2) 10.4%
7.69%
11.89%
8.28%
Explanation / Answer
Pb 14:
Levered Beta = Market Equity Bet * [ Equity + debt (1-T) ] / Equity
= 1.13 * [ 13685 + 3652 ( 1 - 0.35) ] / 13685
= 1.13 * [ 13685 + 3652 ( 0.65) ] / 13685
= 1.13 * [ 13685 + 2373.8 ] / 13685
= 1.13 * [ 16058.8 ] / 13685
= 1.326
Equity capital = Rf + Levered beta ( Rp )
= 4.6% + 1.326 ( 7.3%)
= 4.6% + 9.68%
= 14.28%
Pb 15:
Wt of debt capital = Debt / [ DEbt + Equity ]
= 3652 / [ 3652 + 13685 ]
= 3652 / 17337
= 0.2106 i.e 21.06%
Pb 16 :
Levered Beta = Market Equity Bet * [ Equity + debt (1-T) ] / Equity
= 1.13 * [ 0.3 + 0.7 ( 1 - 0.35) ] / 0.3
= 1.13 * [ 0.3 + 0.7 ( 0.65) ] / 0.3
= 1.13 * [ 0.3 + 0.455 ] / 0.3
= 1.13 * 0.755 / 0.3
= 2.84
= 1.13 * [ 16058.8 ] / 13685
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