Question

SOLVE ASAP PLEASE *********Your company does not use preferred stocks. The common stock has a beta...

SOLVE ASAP PLEASE

*********Your company does not use preferred stocks.

The common stock has a beta of 1.6.

The market risk premium is 8%.

The risk-free rate is 2%.

The weight of equity is 0.4.

The weight of debt is 0.6.

The pretax cost of debt is 15%.

The tax rate is 20%.

What is the weighted average cost of capital?

A.

13.12%
B.

15.31%
C.

15.68%
D.

16.54%
Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

After-tax Cost of Debt

After-tax Cost of Debt = Pre-tax Cost of Debt x (1 – Tax rate)

= 15.00% x (1 – 0.20)

= 15.00% x 0.80

= 12.00%

Cost of Equity

Cost of Equity = Risk-free rate + (Beta x Market risk premium)

= 2.00% + (1.60 x 8.00%)

= 2.00% + 12.80%

= 14.80%

Weighted average cost of capital

Weighted average cost of capital = (After-tax cost of debt x Weight of debt) + (Cost of equity x Weight of Equity)

= (12.00% x 0.60) + (14.80% x 0.40)

= 7.20% + 5.92%

= 13.12%

Therefore, the Weighted average cost of capital is (a). 13.12%

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
The Bluefield Corporation has 6 million shares of common stock outstanding, 600,000 shares of preferred stock...
The Bluefield Corporation has 6 million shares of common stock outstanding, 600,000 shares of preferred stock that pays an annual dividend of $8.00, and 200,000 - $1000 par value bonds with a 10% coupon. The bonds pay interest semi-annually, and have 20 years to maturity. At present, the common stock is selling for $50 per share, the bonds for $950.62 each, and the preferred stock at $74 per share. The estimated required rate of return on the market is 13%,...
Company Y has common stock beta 1.4. Risk free rate is 5% and market risk premium...
Company Y has common stock beta 1.4. Risk free rate is 5% and market risk premium is 8%. Company Y cost of debt is 5,4%. Company tax rate is 35%. Debt to equity ratio is 0.6. Calculate E/V ratio. Express your answer as %.
Before-tax cost of debt (B-T rd) 8% Tax rate 34% Net Price of Preferred stock (after...
Before-tax cost of debt (B-T rd) 8% Tax rate 34% Net Price of Preferred stock (after deducting floatation costs) $32.00 Dividend per share of Preferred $3.40 Current price of Common stock stock $52.00 Dividend paid in the recent past for Common $2.50 Growth rate 6% Stock Beta 0.81 Market risk premium, (MRP) 6.2% Risk free rate ( rf ) 5.5% Flotation cost for common stock 5% Weight of debt in the target capital structure 40% Weight of preferred stock in...
A firm’s optimal capital structure is 45% debt, 10% preferred stock, and 45% common equity. The...
A firm’s optimal capital structure is 45% debt, 10% preferred stock, and 45% common equity. The firm’s tax rate is 43%. The beta coefficient of the firm’s debt is 0.2, the risk-free rate of interest is 2.7% and the market risk premium (RM-RF) is 7.3%. The firm’s preferred stock currently has a price of $84 and it carries a dividend of $10 per share. Currently, the price of a share of common equity was $29 per share. The last dividend...
Your company has a target capital structure of 40% debt, 15% preferred, and 45% common equity....
Your company has a target capital structure of 40% debt, 15% preferred, and 45% common equity. Your bonds carry a 9% coupon, have a par value of $1,000, and 7 years remaining until maturity. They are currently selling for $950.51. The cost of preferred is 7.50%. The risk free rate is 4%, the market risk premium is 8%, and beta is 1.0. The firm will not be issuing any new stock, and the tax rate is 40%. What is its...
All City, Inc., is financed 45% with​ debt, 6% with preferred​ stock, and 49% with common...
All City, Inc., is financed 45% with​ debt, 6% with preferred​ stock, and 49% with common stock. Its cost of debt is 5.8%​, its preferred stock pays an annual dividend of $2.52 and is priced at $29. t has an equity beta of 1.13. Assume the​ risk-free rate is 2.1%​, the market risk premium is 7.3% and​ All City's tax rate is 35%. What is its​ after-tax WACC?
A firm has a​ long-term debt of $54,000​ common equity of $94,000​, and preferred stock of...
A firm has a​ long-term debt of $54,000​ common equity of $94,000​, and preferred stock of $16,000. What is its current capital​ structure? If debt costs 10.1 % pretax, preferred stock costs 12 % and equity costs 15.2 % what is the WACC​ (assuming a 40% tax​ rate)? A The total value of the capital is B The weight of the debt component is C The weight of the preferred stock component is D The weight of the equity component...
​AllCity, Inc., is financed 38% with​ debt, 13% with preferred​ stock, and 49% with common stock....
​AllCity, Inc., is financed 38% with​ debt, 13% with preferred​ stock, and 49% with common stock. Its cost of debt is 5.8%​, its preferred stock pays an annual dividend of $2.48 and is priced at $25. It has an equity beta of 1.1. Assume the​ risk-free rate is 1.9 %​, the market risk premium is 7.1% and​ AllCity's tax rate is 35%. What is its​ after-tax WACC? ​Note: Assume that the firm will always be able to utilize its full...
Consider the following capital structure for AAA Corporation. The company has one debt issue, preferred stock...
Consider the following capital structure for AAA Corporation. The company has one debt issue, preferred stock and common stock in its capital structure. The firm’s tax rate is 40%; the risk-free rate is 3%. Details on the components of the capital structure are listed below. Bond issue: Preferred equity: Common equity: Coupon-paying issue $100 million par 10% semiannual coupon Remaining maturity of 15 years Currently priced in market at 90% of par value Coupon-paying issue $50 million par 6% annual...
The BHP Corporation has debt with a market value of $55 million, preferred stock worth $3...
The BHP Corporation has debt with a market value of $55 million, preferred stock worth $3 million outstanding, and common equity with a market value of $42 million. The company’s debt yields 9.5 percent. Its preferred stock pays $6.5 per share fixed dividend and is currently priced at $50 per share. The company’s common stock has a beta of 0.90, the risk-free rate is 4 percent and the market risk premium is 8 percent. Given that BHP Corporation faces 30...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT