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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%