does not issue preferred sh is ,2%, and cost of debtis loss? The tax rate is 25%
ID: 2800062 • Letter: D
Question
does not issue preferred sh is ,2%, and cost of debtis loss? The tax rate is 25%. The firm A, 20% B. 13 J. What proportion of the firm is financed by debt for a firm that has 15% cost of equity. w C.40% D 2/3 E. 8096 4. Typically, in the NPV model free cash flows are discounted at A. Cost of debt B. Cost of common equity C. Cost of preferred equity D. After-tax cost of debt E. WACC 5. Consider a projoct of the Cornell Haul Moving Company, the timing and size of the incremental after-tax cash flows (for an all-equity firm) are shown below in millions: +3125 5250 -$375 $500 The firm's tax rate is 34%; the firm's bonds trade with a yield to maturity of 8%: the current and target debt-equity ratio is 2, the required return on equity is 10%. Using the weighted average cost of capital methodology, what is the NPV? Based on your rounding in the intermediate steps, you might not get the exact same answer. A. -$1,406,301 B. $12,494,643 C. $36,862,472 D. $10,994,618 E $59,459,301Explanation / Answer
Answer 3 is C.
Cost of Equity = 15%
WACC = 12%
Cost of Debt = 10%
tax rate = 25%
Weight of Debt = x
Weight of Equity = 1-x
WACC = Weight of Debt*Cost of Debt*(1-tax) +Weight of Equity*Cost of Equity
12% = x*10%*(1-0.25) + (1-x)*15%
12% = x*7.50% + 15% - 15%*x
12% = 15% - 7.50%*x
7.50%*x = 3%
x = 0.40
Weight of Debt = 0.40 = 40%
Answer 4 is E.
Typically, in the NPV model free cash flows are discounted at WACC.
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