Question

Glacier Inc. has no long-term debt. Its cost of equity is 20%, and its marginal tax rate is 0.34. The board of directors decided to change its capital structure such that the debt/equity ratio becomes 0.7. The company can borrow at an interest rate of 4%.

**1. What was the WACC before the
restructuring?**

**2. What is the new cost of equity?**

**3. What is the new WACC?**

Answer #1

1

WACC before restructing = cost of equity = 20%

2

Levered cost of equity = Unlevered cost of equity+D/E*( Unlevered cost of equity-cost of debt)*(1-tax rate) |

Levered cost of equity = 20+0.7*(20-4)*(1-0.34) |

Levered cost of equity = 27.39 |

3

D/A = D/(E+D) |

D/A = 0.7/(1+0.7) |

=0.4118 |

After tax cost of debt = cost of debt*(1-tax rate) |

After tax cost of debt = 4*(1-0.34) |

= 2.64 |

Weight of equity = 1-D/A |

Weight of equity = 1-0.4118 |

W(E)=0.5882 |

Weight of debt = D/A |

Weight of debt = 0.4118 |

W(D)=0.4118 |

WACC=after tax cost of debt*W(D)+cost of equity*W(E) |

WACC=2.64*0.4118+27.39*0.5882 |

WACC% = 17.2 |

A firm has a debt to equity ratio of 2/3. Its cost of equity
is 15.2%, cost of debt is 4%, and tax rate is 35%. Assume that the
risk-free rate is 4%, and market risk premium is 8%.
Suppose the firm repurchases stock and finances the
repurchase with debt, causing its debt to equity ratio to change to
3/2:
What is the firm’s WACC before and after the change in
capital structure?
Compute the firm’s new equity beta and...

Mark IV Industries' current debt to equity ratio is 0.4; it has
a (levered) equity beta of 1.4, and a cost of equity 15.2%.
Risk-free rate is 4%, the market risk premium is 8%, the cost of
debt is 4%, and the corporate tax rate is 34%. The firm is in a
matured business, ie. it is not growing anymore. It has long-term
debt outstanding that is rolled over when it matures, so that the
amount of debt outstanding does...

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...

The cost of retained earnings is closest to
the cost of long-term debt
the cost of common stock equity
zero
the marginal cost of capital
When the face value of a bond equals its selling price, the
firms cost of the bond will be equal
the coupon interest rate
the firm's WACC
the risk free rate
the firm's WMCC
Assume that the cost of equity is 10%, the pre tax cost of debt
is 7% and the cost of preferred...

A company currently has the debt-to-equity ratio of 1/3. Its
cost of debt is 4% before tax and its cost of equity is 12%. Assume
that the company is considering raising the debt-to-equity ratio to
1/2. The tax rate is 20%. What is its new cost of equity under the
new debt-to-equity ratio? What is its new weighted average cost of
capital (WACC) under the new debt-to-equity ratio.

A company currently has the debt-to-equity ratio of 1/3. Its
cost of debt is 6% before tax and its cost of equity is 12%. Assume
that the company is considering raising the debt-to-equity ratio to
1/2. The tax rate is 20%. What is its new cost of equity under the
new debt-to-equity ratio? What is its new weighted average cost of
capital (WACC) under the new debt-to-equity ratio.

Company's cost of common equity is 12%, before-tax cost of debt
is 8% and its margin tax rate is 30%. Given the market value
capital below, calculate its WACC:
Long-term debt = $11,000,000
Common equity = 39,000,000
Total Capital = $50,000,000

Kose, Inc. has a target debt-equity ratio of 0.38. Its WACC is
10.1% and the tax rate is 25%.
a.
If the company’s cost of equity is 12%, what is the pretax cost of
debt?
b.
If instead you know the aftertax cost of debt is 6.4%, what is the
cost of equity?

Danida Inc. has a target debt-equity ratio of 1.15. Its WACC is
7.5%, and the tax rate is 30%. If Danida's cost of equity is 12%,
what is its pre-tax cost of debt?
Multiple Choice
6.23%
4.03%
8.43%
7.33%
5.13%

Kose, Inc., has a target debt-equity ratio of 0.7. Its WACC is
10 percent, and the tax rate is 33 percent.
If Kose’s cost of equity is 16 percent, what is its pretax cost
of debt? (Round your answer to 2 decimal places. (e.g.,
32.16))
Pretax cost of debt
%
If instead you know that the aftertax cost of debt is 7.3
percent, what is the cost of equity? (Round your answer to
2 decimal places. (e.g.,...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 4 minutes ago

asked 26 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago

asked 3 hours ago

asked 3 hours ago