Log in
Finance
1
answer
0
watching
134
views

You are provided the following information:

Debt $ 90000

Equity $ 90000

The shares trade at $ 10; the growth rate is 10%. Dividends last year were $ 1.00. The firm has a 40% tax rate.

$ 100 face value, 30 year, 8% coupon bonds trade at par.

1 What is the weighted average cost of capital (WACC) ?

2 What is the WACC if the CFO decides on changing the capital structure to 60% debt and 40% equity?

3 What happens to WACC if the capital structure changes to Debt 40% and 60% equity?

4 What can you say about WACC?

Watch
1
answer
0
watching
134
views

For unlimited access to Homework Help, a Homework+ subscription is required.

Sixta Kovacek
Sixta KovacekLv2
28 Sep 2019

Unlock all answers

Get 1 free homework help answer.
Already have an account? Log in
Share

Related questions

2. Here is the definition for the weighted average cost of capital (WACC): The WACC is the expected averagefuture cost of capital over the long run; found by weighting the cost of each specific type of capital by its
proportion in the firm’s capital structure. Using this definition and the WACC equation we presented in class,

answer the following questions:
(a) Why does the definition specifically state the “long run cost of capital”?

(b) A firm’s long run target of debt and equity capital is respectively, 40-60. Under this long run capitalstructure, the after-tax cost of debt is 5% and after-tax cost of equity is 13%. Calculate the WACC.


(c) The firm’s board of directors is considering a long run capital change from a 40-60 mix of debt and equitycapital to 60% debt. Using this new information and the part (b) after-tax cost of debt and equity, calculate the
firm’s new WACC and clearly state why it is lower than the WACC you calculated in part (b).

(d) Let’s assume the board of directors really likes the lower WACC, and decides to change the firm’s long-rundebt capital structure to 60%. This decision was made despite the firm’s lender stating being more leveragedwill significantly elevate the lender’s risk exposure because the firm’s default risk will skyrocket. Do you thinkthey will actually realize the lower WACC you calculated in part (c)? Why or why not? Hint: Consider what the lender might do in response to a 60% debt capital structure

Rollins Corporation is estimating its WACC. It’s current and target capital structure is 40 percent debt and 60 percent common equity. Its bonds have a 12 percent coupon, paid semiannually, a current maturity of 20 years, and sell for $1,040. Rollins' beta is 1.2, and the risk-free rate is 10 percent. Rollins is a constant-growth firm which just paid a dividend of $2.00. Its stock sells for $27.00 per share, and has a growth rate of 8 percent. The firm's marginal tax rate is 40 percent.

Question 4) If the floatation cost for debt is 5% and the floatation cost for equity is 15%, what is the weighted average cost of capital (WACC) for new funds?

Question 5) Given the floatation costs in question 4 above, how much capital, debt and equity, does the firm have to raise to receive $10 million?

Problem 10-8 Cost of Common Equity and WACC Patton Paints Corporation has a target capital structure of 35% debt and 65% common equity, with no preferred stock. Its before-tax cost of debt is 8% and its marginal tax rate is 40%. The current stock price is P0 = $31.00. The last dividend was D0 = $3.75, and it is expected to grow at a 4% constant rate. What is its cost of common equity and its WACC? Round your answers to two decimal places. rs = % WACC = %

Weekly leaderboard

Home
Homework Help 3,900,000
Finance 370,000
Start filling in the gaps now
Log in