Diddy Corp Stock Has A Beta Of 14, The Current Risk-Free Rat

Question

Diddy Corp Stock Has A Beta Of 14 The Current Risk Free Rate Is 6 P Diddy Corp. stock has a beta of 1.4, the current risk-free rate is 6 percent, and the expected return on the market is 15.00 percent. What is Diddy’s cost of equity? (Round your answer to 2 decimal places) Suppose you sell a fixed asset for $113,000 when its book value is $133,000. If your company’s marginal tax rate is 35 percent, what will be the effect on cash flows of this sale (i.e., what will be the after-tax cash flow of this sale)? ATCF? Your company is considering a new project that will require $794,000 of new equipment at the start of the project. The equipment will have a depreciable life of 8 years and will be depreciated to a book value of $146,000 using straight-line depreciation. The cost of capital is 11 percent, and the firm’s tax rate is 30 percent. Estimate the present value of the tax benefits from depreciation. (Round your answer to 2 decimal places) Oberon, Inc., has a $35 million (face value) 10-year bond issue selling for 94 percent of par that pays an annual coupon of 8.20 percent. What would be Oberon’s before-tax component cost of debt? (Round your answer to 2 decimal places) PLEASE MAKE SURE YOU FOLLOW HIGH-LIGHTED AREAS.

Dr. Jack HW Helper · Accepted Answer

The assignment involves several financial analyses, including calculating the cost of equity, after-tax cash flows from asset sale, depreciation tax shields for a new project, and the before-tax cost of debt for a bond issue. Each component requires understanding of fundamental financial concepts such as the Capital Asset Pricing Model (CAPM), tax effects on asset disposition, straight-line depreciation, and bond valuation. This comprehensive approach provides insights into core financial decision-making processes critical for corporate finance strategy. Cost of Equity Calculation Using the Capital Asset Pricing Model (CAPM), the cost of equity is calculated as follows: Cost of Equity = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate) Given the data: Risk-Free Rate = 6%, Beta = 1.4, Market Return = 15% Cost of Equity = 6% + 1.4 (15% - 6%) = 6% + 1.4 9% = 6% + 12.6% = 18.60% Therefore, Diddy’s cost of equity is approximately 18.60%. After-Tax Cash Flow from Asset Sale The sale of an asset at a loss affects cash flows due to tax implications. The sale proceeds are $113,000, with a book value of $133,000, resulting in a loss of $20,000. The tax shield from the loss is calculated as: Tax Shield = Loss Tax Rate = $20,000 35% = $7,000 The after-tax cash flow (ATCF) from the sale considers the sale proceeds plus the tax shield: ATCF = Sale Price + Tax Shield = $113,000 + $7,000 = $120,000 This represents the net cash inflow after accounting for taxes on the loss. Present Value of Depreciation Tax Benefits The project entails purchasing equipment costing $794,000, depreciated straight-line over 8 years to a residual value of $146,000. The annual depreciation expense is: Annual Depreciation = (Cost - Salvage Value) / Useful Life = ($794,000 - $146,000) / 8 = $648,000 / 8 = $81,000 Tax rate = 30%, so annual tax shield = Depreciation Tax Rate = $81,000 30% = $24,300 The present value of the tax benefits is calculated as the PV of an annuity of these annual savings over

Diddy Corp Stock Has A Beta Of 14, The Current Risk-Free Rat

Diddy Corp Stock Has A Beta Of 14 The Current Risk Free Rate Is 6 P

Paper For Above instruction

Cost of Equity Calculation

After-Tax Cash Flow from Asset Sale

Present Value of Depreciation Tax Benefits

Before-Tax Cost of Debt for Oberon, Inc.

Conclusion

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