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Homework answers / question archive / You are going to analyze three companies in the Consumer Staples Industry
You are going to analyze three companies in the Consumer Staples Industry. The relevant information is presented in the following table. You expect that earnings before interest and taxes (EBIT) will remain constant of all three companies for the foreseeable future. The marginal tax rate is 30% for all companies. Bema has announced that it will issue debt and use the proceeds to repurchase shares. As a result of the announced program, Bema indicates that its D/E ratio will increase to 0.6 and its before-tax cost of debt will be 6%. Garth has: announced that it plans to abandon the prior policy of all-equity financing by the issuance of $1 million in debt in order to buy back an equivalent amount of equity. Garth's before-tax cost of debt is 6% Aquarius Bema Garth EBIT ($) 600,000 600,000® 600,000 D/E(market value) 0.6 0 e Debt(market value)($)
Working note:
Computation of cost of equity
| Particular | Amount |
| EBIT |
600000 |
| Less: Interest (2000000 X 6%) | 120000 |
| EBT | 480000 |
| Less: Tax @ 30% | 144000 |
| EAT | 336000 |
| Equity (2000000 / 0.6) | 3333333.33 |
| Cost of equity (336000 / 3333333.33) | 10% |
b. Computation of B's WACC
Working note:
Computation of cost of equity
| Particular | Amount |
| EBIT |
600000 |
| Less: Interest (2000000 X 6%) | 151200 |
| EBT | 448800 |
| Less: Tax @ 30% | 134640 |
| EAT | 314160 |
| Equity (600000 - 30% / 0.10) | 4200000 |
| Cost of equity (336000 / 3333333.33) | 7.48% |
c. Computation of G's cost of equity
| Particular | Amount |
| EBIT |
600000 |
| Less: Interest (1000000 X 6%) | 60000 |
| EBT | 540000 |
| Less: Tax @ 30% | 162000 |
| EAT | 378000 |
| Equity (600000 - 30% / 0.10) - 1000000 | 3200000 |
| Cost of equity (336000 / 3333333.33) | 11.81% |
please see the attached file.
