Question

The current capital structure is 35 percent debt and 65 percent equity. The after-tax cost of our debt is 6 percent, and the cost of our equity (in retained earnings) is 13 percent. Please compute the firm’s current weighted average cost of capital. One of the things we discussed with our investor, due to the current low interest rate environment, is moving our capital structure to 45 percent debt and 55 percent equity. With this new structure, the after-tax cost of debt will rise to 7 percent, and the cost of equity (in retained earnings) will go to 14 percent. Based on this information, compute the firm’s new weighted average cost of capital. Which is the more optimal in terms of minimizing the weighted average cost of capital? Why?

Answer #1

Evans Technology has the following capital structure. Debt 35 %
Common equity 65 The aftertax cost of debt is 8.50 percent, and the
cost of common equity (in the form of retained earnings) is 15.50
percent.
a. What is the firm’s weighted average cost of capital? (Do not
round intermediate calculations. Input your answers as a percent
rounded to 2 decimal places.) An outside consultant has suggested
that because debt is cheaper than equity, the firm should switch to
a...

The Tyler Oil Company’s capital structure is as follows: Debt 65
% Preferred stock 10 Common equity 25 The aftertax cost of debt is
11 percent; the cost of preferred stock is 14 percent; and the cost
of common equity (in the form of retained earnings) is 17 percent.
a-1. Calculate Tyler Oil Company’s weighted average cost of
capital. (Round the final answers to 2 decimal places.) Weighted
Cost Debt (Kd) % Preferred stock (Kp) Common equity (Ke) Weighted
average...

Dunkin currently has a capital structure of 60 percent debt and
40 percent equity, but is considering a new product that will be
produced and marketed by a separate division. The new division will
have a capital structure of 80 percent debt and 20 percent equity.
Dunkin has a current beta of 2.1, but is not sure what the beta for
the new division will be. AMX is a firm that produces a product
similar to the product under consideration...

US Robotics Inc. has a current capital structure of 30% debt and
70% equity. Its current before-tax cost of debt is 6%, and its tax
rate is 25%. It currently has a levered beta of 1.10. The risk-free
rate is 3%, and the risk premium on the market is 7.5%. US Robotics
Inc. is considering changing its capital structure to 60% debt and
40% equity. Increasing the firm’s level of debt will cause its
before-tax cost of debt to increase...

A firm’s capital structure is 10% debt and 90% common equity.
The tax rate is 25%, the interest rate on new debt is 12%, and the
cost of common equity is 16.15%. The firm’s weighted average cost
of capital (WACC) is what %. This is calculated to two decimal
places using the following formula: WACC = WCS × CCS + WPS × CPS +
WD × CD

The McGee Corporation finds it is necessary to determine its
marginal cost of capital. McGee’s current capital structure calls
for 35 percent debt, 25 percent preferred stock, and 40 percent
common equity. Initially, common equity will be in the form of
retained earnings (Ke) and then new common
stock (Kn). The costs of the various sources of
financing are as follows: debt (after-tax), 5.4 percent; preferred
stock, 9.0 percent; retained earnings, 10.0 percent; and new common
stock, 11.2 percent.
a....

The firm's target capital structure is the mix of debt,
preferred stock, and common equity the firm plans to raise funds
for its future projects. The target proportions of debt, preferred
stock, and common equity, along with the cost of these components,
are used to calculate the firm's weighted average cost of capital
(WACC). If the firm will not have to issue new common stock, then
the cost of retained earnings is used in the firm's WACC
calculation. However, if...

Percent of capital structure:
Debt
35
%
Preferred stock
20
Common equity
45
Additional information:
Bond coupon rate
11%
Bond yield to maturity
9%
Dividend, expected common
$
5.00
Dividend, preferred
$
12.00
Price, common
$
60.00
Price, preferred
$
120.00
Flotation cost, preferred
$
3.80
Growth rate
8%
Corporate tax rate
40%
Calculate the Hamilton Corp.'s weighted cost of each source of
capital and the weighted average cost of capital.
Weighted Cost
Debt=
Preferred stock=
Common equity=...

Problem 21-05
Given the following, determine the firm’s optimal capital
structure:
Debt/Assets
After-Tax Cost of Debt
Cost of Equity
0
%
6
%
13
%
10
6
13
20
7
13
30
7
13
40
9
14
50
10
15
60
12
16
Round your answers for capital structure to the nearest whole
number and for the cost of capital to one decimal place.
The optimal capital structure: _______ % debt and ______% equity
with a cost of capital of...

The Cost of Capital: Weighted Average Cost of
Capital
The firm's target capital structure is the mix of debt,
preferred stock, and common equity the firm plans to raise funds
for its future projects. The target proportions of debt, preferred
stock, and common equity, along with the cost of these components,
are used to calculate the firm's weighted average cost of capital
(WACC). If the firm will not have to issue new common stock, then
the cost of retained earnings...

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