20) ter tax cash flow must be estimated Tweek\'s Coffee has financing. The compa
ID: 2801902 • Letter: 2
Question
20) ter tax cash flow must be estimated Tweek's Coffee has financing. The company has a capital structure consisting of 20 percent debt and 80 percent common equity dedsWhat is the maximum amount of new financing that the company can raise structure ngs as dividends400 million in net income and plans to pay out 25 percent of their without selling new common stock? A. $375 million B. $286 million C. $500 million D. $1500 million 21) Fiscal Cliff Inc. has a capital structure that consists of 15 percent common stock and 85 percent long-term debt. In order to calculate Fiscal Cliffs weighted average cost of capital, an analyst has accumulated the following information: The company currently has 15-year bonds outstanding with annual coupon payments of 9 . percent. The bonds have a face value of $1,000 and sell for $700. The risk-free rate is 2.5 percent. · . . The market risk premium is 7 percent. The beta on Fiscal Cliffs common stock is 2.2 The company's retained earnings are sufficient so that they do not have to issue any nevw common stock to fund capital projects. The company's tax rate is 40 percent. · Given this information, what is Fiscal Cliffs WACC? A. 11.35% B. 7.28% D. 8.91% E. 9.75%Explanation / Answer
WACC = x Re + x Rd x (1 – Tc)
Where:
Calculation of cost of equity
According to CAPM
Required (or expected) Return = RF Rate + (Market Return – RF Rate)*Beta
Re=0.025+.07×2.2
Re=17.9%
WACC=.09× (1-40%)×85/100+.179×15/100
=.0459+.02685
=.7275(rounding off)
=.728
=7.28%
Answer is 7.28%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.