🏷️ LIMITED TIME OFFER: GET 20% OFF GRADE+ YEARLY SUBSCRIPTION →
Log in
Finance
1
answer
0
watching
714
views
21 Sep 2018

The effect of tax rate on WACC: K. Bell Jewelers wishes to exlore the effect on its cost of capital of the rate at which the company pays taxes. The firm wishes to maintain a capital structure of 40% debt, 10% preferred stock, and 50% common stock. The cost of financing with retained earnings is 10%, the cost of preffered stock financing is 8%, and the before-tax cost of debt financing is 6%. Calculate the weighted average cost of capital (WACC) given the tax rate assumptions in parts a to c.

A. Tax rate= 40%

B. Tax rate= 35%

C. Tax rate= 25%

D. Describe the relationship between changes in the rate of taxation and the weighted average cost of capital.

Watch
1
answer
0
watching
714
views

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

Irving Heathcote
Irving HeathcoteLv2
22 Sep 2018

Unlock all answers

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

Related questions

Part I. Given the tax rate of 40% of this corporation, calculate its after-tax weighted average cost of capital (WACC) for Duke Corporation.

Table: the before-tax weighted average cost of capital (WACC) for Duke Corporation

Source of Capital Weight (1) Cost (2) Weighted Cost (1) X (2)
Long-Term Debt .4 5.6% 2.24%
Preferred Stock .1 10.6% 1.06%
Common Stock Equity .5 13% 6.5%
Totals 1 9.8%

Part II. Answer true, false or uncertain and explain briefly on the following statement. "the after-tax wacc cannot ever be higher than the before-tax wacc."

Weighted Average Cost of Capital

A firm has determined its optimal capital structure, which is illustrated by the information below.

Source of Capital (Target Market Proportions)

Long term debt (20%)

Preferred Stock (10)

Common Stock Equity (70)

To expand operations, the firm is considering the following sources of financing its capital expenses:

Debt -The firm can sell 12-year, 1,000 par value bond paying a 7% annual coupon for $960. To issue the bond the firm will have to pay bond issuance or flotation cost of 2 percent of the face value of the bond.

Preferred Stock- the firm has determined that it can issue preffered stock at a par value price of $75 per share. The stock will pay $10 annual dividend. The cost of issuing and selling the stock is $3 per share.

Common Stock: A firms common stock is currently selling for $18 per share. The dividend expected to be paid at the end of the coming year is $1.74. The firms dividends have been growing at a constant rate of 4% per year for the last four years and are expected to sustain that growth rate thereafter.

New common stock issue- if the firm decides to issue new common stock, its underwriter indicated that the issue will have to be underpriced by $1 below the current share price. Further, the firm will have to pay $1 per share in issuance or floatation cost.

Additionaly, the firms marginal corporate tax rate is 40 percent.

(Given the information above)

A) find the firms before-tax cost of debt financing

B) find the firms after-tax cost of debt financing

C) find the firms cost of preffered stock financing

D) find the firms cost of financing using the retained earnings

e) find the firms cost of financing using a new common stock issue

f)find the firms weighted average cost of capital, if the firm uses debt, preffered stock and retained earnings to finance its investments. Given this result, explain what rate of return the firm should require from its investors.

g) Find the firms weighted average cost of capital, if the firm uses debt, preffered stock, retained earnings, and new stock issue to finance its investments. Given this results, explain what rate of return the firm should require from its investments.

1.

Suppose that JB Cos. has a capital structure of 75 percent equity, 25 percent debt, and that its before-tax cost of debt is 13 percent while its cost of equity is 17 percent. Assume the appropriate weighted-average tax rate is 25 percent.

What will be JB’s WACC? (Round your answer to 2 decimal places.)

WACC %

2.

Suppose that B2B, Inc., has a capital structure of 36 percent equity, 16 percent preferred stock, and 48 percent debt. Assume the before-tax component costs of equity, preferred stock, and debt are 14.0 percent, 10.0 percent, and 9.0 percent, respectively.

What is B2B’s WACC if the firm faces an average tax rate of 30 percent? (Round your answer to 2 decimal places.)

WACC %

3.

ILK has preferred stock selling for 96 percent of par that pays a 8 percent annual coupon.

What would be ILK’s component cost of preferred stock? (Round your answer to 2 decimal places.)

Cost of preferred stock %

Related Documents

FIN 401
Final Exam
Study Guide
FIN 401 Study Guide - Midterm Guide: Liquidating Distribution, Dividend Policy, Tax Shield
ochreguinea-pig475
FIN 401
Final Exam
Study Guide
FIN 401 Study Guide - Final Guide: Shares Outstanding, Liquidating Distribution, Stock Split
yellowmallard965
AFF 310 Lecture Notes - Weighted Arithmetic Mean, Preferred Stock, European Cooperation In Science And Technology
byzantiumdog558

Weekly leaderboard

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