Case Problem V. Chatham Craft\'s capital structure consists of $30 million of de

Question

Case Problem V.

Chatham Craft's capital structure consists of $30 million of debt and $90 million of equity. The Company's CFO has provided the following data: interest rate on debt is 8%; the Company's tax bracket is 30%; the current stock dividend is $2.00; the expected dividend growth rate is 8%; the current stock price is $40.

After submitting all your work, including formulas and calculations, answer the following questions.

29. What is Chatham's after-tax cost of debt ?

30. What is Chatham's cost of equity ?

31. What are the weightings of debt and equity ?

32. What is the WACC ?

33. If the proportion (weighting) of equity in Chatham's cap structure were to increase and the proportion of debt were to decrease, what would happen to the Company's WACC? Briefly explain why.

Explanation / Answer

29. after-tax cost of debt= 8(1-.3)= 5.6% 30.cost of equity=( D1/Pe)+g =(2x1.08/40)+.08= 13.4% 31. Weight of debt= 30/120=25% Weight of equity= 90/120= 75% 32.WACC= (.25x5.6)+(.75x13.4)= 11.45% 33. If the proportion (weighting) of equity in Chatham's cap structure were to increase and the proportion of debt were to decrease then the WACC will increase.

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.