3. Assume you have just been hired as a business manager of Pamela’s Pizza, a regional...

50.1K

Verified Solution

Question

Finance

3.   Assume you have just been hired as a businessmanager of Pamela’s Pizza, a regional     pizza restaurant chain. The firm is currently financed with allequity and it has 15 million shares outstanding. When you took yourcorporate finance course, your instructor stated that most firm’sowners would be financially better off if the firms used some       debt. When you suggested thisto your new boss, he encouraged you to pursue the idea.        As a first step, assumethat you obtained from the firm’s investment banker the     following estimated costs of debt for thefirm at different capital structures:
                                                   %Financed WithDebt         r_d
                                                             0%                                      ---
                                                            10                               8.0%
                                                            25                               9.0
                                                            35                            10.5
                                                            45                               12.0
      If the company were torecapitalize, debt would be issued, and the funds received would beused to repurchase stock. Pamela’s Pizza is in the 25 percentstate-plus-federal corporate tax     bracket, itsbeta is 0.75, the risk-free rate is 4 percent, and the market riskpremium is 7       percent.
      For each capital structure underconsideration, calculate the levered beta, the cost of equity,          and theWACC.

Answer & Explanation Solved by verified expert

4.5 Ratings (928 Votes)

i Levered beta calculations Unlevered beta 075 Tax rate 25 or 025 Levered beta Unlevered beta 1 1 Tax rateDebtEquity Weight of debt Weight of equity 1 weight of debt DebtEquity Levered beta using formula 10 or 010 090 010090 011 075 11025 See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

3. Assume you have just been hired as a businessmanager of Pamela’s Pizza, a regional pizza restaurant chain. The firm is currently financed with allequity and it has 15 million shares outstanding. When you took yourcorporate finance course, your instructor stated that most firm’sowners would be financially better off if the firms used some debt. When you suggested thisto your new boss, he encouraged you to pursue the idea. As a first step, assumethat you obtained from the firm’s investment banker the following estimated costs of debt for thefirm at different capital structures: %Financed WithDebt rd 0% --- 10 8.0% 25 9.0 35 10.5 45 12.0 If the company were torecapitalize, debt would be issued, and the funds received would beused to repurchase stock. Pamela’s Pizza is in the 25 percentstate-plus-federal corporate tax bracket, itsbeta is 0.75, the risk-free rate is 4 percent, and the market riskpremium is 7 percent. For each capital structure underconsideration, calculate the levered beta, the cost of equity, and theWACC.