11. Consider a firm that would have a cost of equity of 12 percent if it were an

Q: 11. Consider a firm that would have a cost of equity of 12 percent if it were an

1. Formula of weighted average cost of capital is: WACC = WEKE + WDKD(after tax) Where, WE is weight of equity WD is weight of debt KE is cost of equity KD is cost of debt Debt /equity ratio = Debt / Equity = 12/8= 1.5 Thus, WE = 4 million WD = 2 million Substituting value in equation: WACC = (4*12%) + (2*8%) = 0.48+0.16 = 0.64 or 64% (Answer)

ID: 2778355 • Letter: 1

Question

11. Consider a firm that would have a cost of equity of 12 percent if it were an all-equity firmm The firm has $4 million of assets at market value. Suppose that it has S2 million of debt outstanding and that the cost of that debt is 8 percent. Calculate and demonstrate the weighted average cost of capital for this firm if it pays no taxes Calculate and demonstrate the weighted average cost of capital for this firm if it does pay taxes and the net tax advantage to debt is 20 cents per dollar of interest paid. .

Explanation / Answer

Formula of weighted average cost of capital is:

WACC = WEKE + WDKD(after tax)

Where,

WE is weight of equity

WD is weight of debt

KE is cost of equity

KD is cost of debt

Debt /equity ratio = Debt / Equity = 12/8= 1.5

Thus, WE = 4 million

WD = 2 million

Substituting value in equation:

WACC = (4*12%) + (2*8%)

= 0.48+0.16

= 0.64 or 64% (Answer)

Navigate

11. Consider a file system that uses a structure similar to an i-node with the f

11. Consider a spring-mass system as discussed in class, modeled by the equation

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

11. Consider a firm that would have a cost of equity of 12 percent if it were an

Question

Explanation / Answer

Related Questions

Navigate