Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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(a) An MNC has total assets of $150 million and debt of $50 million. The
firm's before-tax cost of debt is 10 percent, and its cost of financing with equity
is 12 percent. The MNC has a corporate tax rate of 32 percent. What is this
firm's weighted average cost of capital?
(b)
Slater Co. is a US based MNC that finances all operations with debt and equity.
It borrows U.S. funds at an interest rate of 10 percent per year. The long-term
risk-free rate in the United States is 5 percent. The stock market return in the
United States is expected to 15 percent annually. Slater's beta is 1.5. Its
target capital structure is 40 percent debt and 60 percent equity. Slater Co.is
subject to a 30 percent corporate tax rate. Estimate the cost of capital to
Slater Co.
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Transcribed Image Text:(a) An MNC has total assets of $150 million and debt of $50 million. The firm's before-tax cost of debt is 10 percent, and its cost of financing with equity is 12 percent. The MNC has a corporate tax rate of 32 percent. What is this firm's weighted average cost of capital? (b) Slater Co. is a US based MNC that finances all operations with debt and equity. It borrows U.S. funds at an interest rate of 10 percent per year. The long-term risk-free rate in the United States is 5 percent. The stock market return in the United States is expected to 15 percent annually. Slater's beta is 1.5. Its target capital structure is 40 percent debt and 60 percent equity. Slater Co.is subject to a 30 percent corporate tax rate. Estimate the cost of capital to Slater Co.
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