Nessumsar company develops educational materials. It has a pre-tax cost of debt
ID: 2379619 • Letter: N
Question
Nessumsar company develops educational materials. It has a pre-tax cost of debt of 8.0% and a cost of equity of 11.0%. tax rate of 40%, $50 million of debt and $100 million of equity.
a. Calculate the company's overall cost of capital.
Cost of Debt:
Pre-tax Cast of Debt ______
Tax Rate ______
After-tax cost of Debt __0.0%____
Cost of Equity:
Cost of Equity: ______
Weights:
dollar value
in millions % Amount
Debt ___________ ______-____
Equity ___________ ___________
Total $ 0.0%
Cost of Capital:
Formula: _______________________
Calculation: _______________________
b. what happens to the cost of equity as more debt gets used relative to equity? Why does this occur?
Explanation / Answer
cost of debt = 8%
tax rate =40%
after tax cost of debt = 8*(1-0.4) = 4.8%
wt of debt = 50/(100+50)
equity wt = 100/(100+50)
company's overall cost of capital = (50/150)*8*(1-0.4)+(100/150)*11= 8.93%
b. as the debt increases cost of equity increases to keep cost of cap[ital same
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