. o Ing.cengage vindex.html ?nbld-607674&nbNodeld-222524; 532&eISBN-978; 1 30563
ID: 2786162 • Letter: #
Question
. o Ing.cengage vindex.html ?nbld-607674&nbNodeld-222524; 532&eISBN-978; 1 305635975&parentld-222525022; MINDTAP Assignment 13-Capital Structure and Leverage Due on Nov 15 at 11:59 PM CST 7. Capital structure theory AaAa allowed to deduct interest payments as an expense. Corporations allowed to deduct dividend payments to Corporations stockholdersse. The differential tax treatment of interest payments and dividend payments encourages firms to use capital strual. are notancing is in their expensive than common or preferred stock financing. Green Goose Automation Company currently has no debt in its capital structure, but it is considering using some debt and reducing its outstanding equity. The firm's unlevered beta is 1.25, and its cost of equity is 13.00%. Because the firm has no debt in its capital structure, its weighted average cost of capital (WACC) also equals 13.00%. The risk-free rate of interest (rw) is 3%, and the market risk premium (RP) is 8%, Green Goose's marginal tax rate is 35%. Green Goose is examining how different levels of debt will affect its costs of debt and equity, as well as its wACC. The firm has collected the financial information that follows to analyze its weighted average cost of capital (WACC). Complete the following table. Before-Tax BondCost of Debt Levered Cost of Beta (b) Equity (r) WACC 13.00% 14.60% 17.32% D/A E/A Ratio Ratio D/E Ratio Rating 1.25 13.00% 12.62% 0.0 1.0 0,2 0.8 0.40.6 0.6 0.4 0.8 0.2 0.00 0.25 0.67 1.50 7.2% 7.7% 8.9% 11.9% 1.79 2.47 4.50 12.58% 39.00% OType here to searExplanation / Answer
1)
Are
Are not
Debt
Less
2)
a)
D/E ratio = 0.8 / 0.2 = 4
b)
Levered Beta = Unlevered Beta * (1 + ((1 - Tax Rate) * (Total Debt/Equity)))
levered beta = 1.25 * (1+((1-35%)*(0.25)))
= 1.45
c)
Equity = Rf + Beta * Risk premium
= 3% + 2.47 * 8%
= 22.76%
d)
WACC = Wd*Rd*(1-tax) + We*Re
WACC = 0.4*7.7%*(1-35%) + 0.6*17.32%
= 12.39%
e)
WACC = 0.8*11.9%*(1-35%) + 0.2*39.00%
= 13.99%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.