Exam 17: International Capital Structure and the Cost of Capital

Find the weighted average cost of capital for a firm that has a debt-to-equity ratio of 2, a tax rate of 40%, a levered cost of equity of 12% and an after-tax cost of debt of 9%.

Micro Spinoffs, Inc., issued 20-year debt one year ago today at par value with a coupon rate of 9 percent, paid annually. Today, the debt is selling at $1,050. If the firm's tax rate is 34%, what is its after-tax cost of debt?

Solve for the weighted average cost of capital:

Find the debt-to-value ratio for a firm with a debt-to-equity ratio of ½.

Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 4 ½.

To maximize the benefits of partial integration of capital markets

Suppose that the British stock market is segmented from the rest of the world. Using the CAPM and a risk-free rate of 5%, estimate the equity cost of capital for Stansfield.

The required return on equity for an all-equity firm is 10.0%. They are considering a change in capital structure to a debt-to-equity ratio of ½ the tax rate is 40%, the pre-tax cost of debt is 8%. Find the new cost of capital if this firm changes capital structure.

Using the notation of the text, the CAPM states:

When the choice of financing a foreign subsidiary is between external debt and equity financing

The Pricing-to-Market phenomenon

Find the debt-to-equity ratio for a firm with a debt-to-total-value ratio of ⁵/₆.

Find the debt-to-equity ratio for a firm with a debt-to-total-value ratio of ⁴/₅.

Assume that XYZ Corporation is a leveraged company with the following information: K_l = cost of equity capital for XYZ = 13% I = before-tax borrowing cost = 8% T = marginal corporate income tax rate = 30% Calculate the debt-to-total-market-value ratio that would result in XYZ having a weighted average cost of capital of 9.3%.

With regard to the financial structure of a foreign subsidiary

Suppose that the firm's cost of capital can be reduced from K^l under the local capital structure to K^g under an internationalized capital structure. The take-away lesson from the graph is that

Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 2½.

The Nestlé episode shows

Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 3½.

Suppose the domestic U.S. beta of IBM is 1.0, that is and that the expected return on the U.S. market portfolio is percent, and that the U.S. T-bill rate is 6 percent. If the world beta measure of IBM is then we can say