Question

Suppose your company is financed 20% with debt and 80% with common stock. a. If the...

Suppose your company is financed 20% with debt and 80% with common stock.

a. If the cost of new borrowing will be 5% and the cost of equity is 12%, what is the cost of capital to your company if the applicable tax rate is 30%?

b. If you were to invest in a project that has a zero NPV, what rate of return would you be earning on the project?

c. If you were to invest in a project that has a zero NPV, what rate of return would you be earning on the portion of the funds provided by the stockholders?

Business   Accounting   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

All answers are attached below

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
As manager of ACME industries, your company is 30% debt financed, 70% equity financed. Assuming the...
As manager of ACME industries, your company is 30% debt financed, 70% equity financed. Assuming the debt is risk-free, and assuming that your equity beta is 1.1, that treasury bills yield 1%, and that the market has an expected return of 8%, what is your weighted average cost of capital assuming a 35% tax rate? Should you invest in a new project with a 10% IRR?
Mandarin is financed 80% by common stock and 20% by bonds. The expected return on the...
Mandarin is financed 80% by common stock and 20% by bonds. The expected return on the common stock is 16% and the rate of interest on the bonds is 8%. Assume that the bonds are default-free and that there are no taxes. Now assume that Mandarin's issues more debt and uses the proceeds to retire equity. The new financing mix is 20% equity and 80% debt. If the debt is still default-free, what happens to the expected rate of return...
7. A firm is financed with 20% long-term debt and 80% common stock. Assume that the...
7. A firm is financed with 20% long-term debt and 80% common stock. Assume that the estimated cost of equity is 15% and the cost of comparable debt is 5%. The corporate tax rate is 40%. Compute the WACC.
A company is financed with a combination of 55% equity and 45% debt. The company has...
A company is financed with a combination of 55% equity and 45% debt. The company has a beta of 1.75. The risk free rate is 4% and the market rate of return is 16%. The debt is currently being traded in the market is 8.5%. The company tax free rate is 35%. With all these data, answer the following questions: 1. What is the company’s afteer tax cost of debt 2.what is the company’s cost of equity 3. What is...
Suppose a firm financed a $150 million perpetual debt and with 10 million shares each worth...
Suppose a firm financed a $150 million perpetual debt and with 10 million shares each worth $1. The expected return on the debt is 8% and the expected return on equity is 16%. The tax rate is 40%. What is the company's cost of capital financed with debt and what is the value of the firm if it were solely financed by equity?
Suppose your company needs $24 million to build a new assembly line. Your target debt?equity ratio...
Suppose your company needs $24 million to build a new assembly line. Your target debt?equity ratio is .60. The flotation cost for new equity is 7 percent, but the flotation cost for debt is only 3 percent. Your boss has decided to fund the project by borrowing money because the flotation costs are lower and the needed funds are relatively small. What do you think about the rationale behind borrowing the entire amount? What is your company’s weighted average flotation...
Consider a company financed with 0.9 equity, 0.0 preferred stock, and the remaining debt subject to...
Consider a company financed with 0.9 equity, 0.0 preferred stock, and the remaining debt subject to a corporate tax rate 0.4 If the required rate of return on the debt is 0.06, on the preferred stock is 0.10 and on the common stock is 0.13, what is the working average cost of capital for this company?
1. A company is financed 60% by debt and 40% by equity. The pre-tax cost of...
1. A company is financed 60% by debt and 40% by equity. The pre-tax cost of debt is currently 10%. The Finance Director has stated that the weighted average cost of capital for the company is 9.6%. What is the cost of equity? Assume the tax rate is 40%. 2. What weakness does the NPV method have that is not present in the payback method? Group of answer choices: a Initial cash flows are ignored. b The NPV method is...
Assume that a company is 35% debt and 65% equity financed. The company has a 10%...
Assume that a company is 35% debt and 65% equity financed. The company has a 10% cost of equity and 8% after-tax cost of debt. It considers undertaking a project which has a life of 5 years. If the cash flows of the project are, on the average, spread evenly over the life of the project, the optimal cutoff period is closest to: Select one: a. 3.9 years b. 4.2 years c. 5.1 years d. 6.1 years
Assume that a company is 35% debt and 65% equity financed. The company has a 10%...
Assume that a company is 35% debt and 65% equity financed. The company has a 10% cost of equity and 8% after-tax cost of debt. It considers undertaking a project which has a life of 5 years. If the cash flows of the project are, on the average, spread evenly over the life of the project, the optimal cutoff period is closest to: Select one: a. 3.9 years b. 4.2 years c. 5.1 years d. 6.1 years
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT