Company X has debt to equity ratio equal to one. Its cost of equity is 10% and its cost of debt is 5%. Keeping fixed the company's capital structure, how does a cut in the corporate tax rate from 20% to 10% affect X's weighted average cost of capital (WACC)? The WACC is reduced since the tax cut makes it easier to raise finance It increases the WACC from 7% to 7.25% O It reduces the WACC from 7,5% to 7.25% O The WACC is unaffected
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- Plz Use excel !!! and show formula A company currently has a WACC of 10.6 percent and no debt. The tax rate is 21 percent. a. What is the company’s current cost of equity? b. If the firm converts to 40 percent debt with a cost of 6%, what will its cost of equity be? And the WACC? c. If the firm converts to 60 percent debt with a cost of 6% , what will its cost of equity be? And the WACC? d. What can you conclude from the values of the cost of equity and WACC obtained in b. and c.You have the following information about two firms, Debt Free, Incorporated and Debt Spree, Incorporated. Both firms have the same prospects for sales and EBIT, and both have the same level of assets, tax rate and borrowing rate. They differ in their use of debt financing. Scenario Bad year Normal year Good year Total assets Tax rate Debt Equity Borrowing rate Sales Interest expense for Debt Free Interest expense for Debt Spree $200 $275 $380 Debt Free $ 250 21% EBIT $12 $ 34 $ 51 $0 $ 250 16% Required: a. Calculate the interest expense for each firm: Debt Spree $ 250 21% $150 $ 100 16%Choose the correct letter of answer and provide solution The following data applies to a firm: Interest charges=P50,000.00; Sales = P300,000.00; Tax Rate=P25%; Net Profit Margin=3%. What is the firm's time interest covered ratio? a. 0.24b. 0.54c. 1.04d. 1.24e. 1.44
- You are given the following information on Kaleb's Heavy Equipment: Profit margin Capital intensity Debt-equity ratio Net income Dividends 18 $70,000 $ 15,200 Sustainable growth rate A Calculate the sustainable growth rate. (Do not round Intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)Choose the correct letter of answer and provide a solution A firm has profit before tax of P63 million. If the company's times interest covered ratio is 8 times, what is the total interest charge? a. P3 Millionb. P6 Millionc. P9 Milliond. P12 Millione. P15 MillionUse the following information about Red Rocks Inc. to answer the following question: Assume the following: Pays no taxes Return on net operating assets (RNOA) = 18% %3D Has $2,000 in net operating assets financed by equity At the beg. of the year borrows $1000 at 8%. Uses debt to buy additional operating assets. What is the return on equity (ROE) for Red Rocks? Edit View Insert Format Tools Table 12pt v Paragraph v B IU A e T?v I.
- Please answer all A company has days of inventory 80 days, days receivable of 30 days, and days payable of 90 days. Calculate the company’s funding gap. 3. Use your own words to explain the following: Weighted Average Cost of Capital (WACC): formula and what it measures Cost of Debt: formula and what it measures Capital Asset Pricing Model (CAPM): formula and what it measuresYou are given the following information on Kayla's Heavy Equipment: Profit margin Capital intensity ratio Debt-equity ratio Net income Dividends 5.4% .63 7 Sustainable growth rate $ 56,000 $ 13,800 Calculate the sustainable growth rate. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) %Fill in the table using the following information.Assets required for operation: $3,000Case A—firm uses only equity financingCase B—firm uses 30% debt with a 10% interest rate and 70% equityCase C—firm uses 50% debt with a 12% interest rate and 50% equityIf your answer is zero, enter "0". Round your answers for monetary values to the nearest cent. Round your answers for percentage values to one decimal place. A B C Debt outstanding $ $ $ Stockholders' equity $ $ $ Earnings before interest and taxes $660.00 $660.00 $660.00 Interest expense $ $ $ Earnings before taxes $ $ $ Taxes (40% of earnings) $ $ $ Net earnings $ $ $ Return on stockholders’ equity % % % What happens to the rate of return on the stockholders' investment as the amount of debt increases? The rate of return on the stockholders' investment as the amount of debt increases.
- CALCULATING 3Ms COST OF CAPITAL In this chapter, we described how to estimate a companys WACC, which is the weighted average of its costs of debt, preferred stock, and common equity. Most of the data we need to do this can be found from various data sources on the Internet. Here we walk through the steps used to calculate Minnesota Mining Manufacturings (MMM) WACC. 3. Next, we need to calculate MMMs cost of debt. We can use different approaches to estimate it. One approach is to take the companys interest expense and divide it by total debt (which is the sum of short-term debt and long-term debt). This approach only works if the historical cost of debt equals the yield to maturity in todays market (i.e., if MMMs outstanding bonds are trading at close to par). This approach may produce misleading estimates in years in which MMM issues a significant amount of new debt. For example, if a company issues a great deal of debt at the end of the year, the full amount of debt will appear on the year-end balance sheet, yet we still may not see a sharp increase in annual interest expense because the debt was outstanding for only a small portion of the entire year. When this situation occurs, the estimated cost of debt will likely understate the true cost of debt. Another approach is to try to find this number in the notes to the companys annual report by accessing the companys home page and its Investor Relations section. Alternatively, you can go to other external sources, such as bondsonline.com, for corporate bond spreads, which can be used to find estimates of the cost of debt. Remember that you need the after-tax cost of debt to calculate a firms WACC, so you will need MMMs tax rate (which has averaged around 30% in recent years). What is your estimate of MMMs after-tax cost of debt?You've collected the following information about Hendrix Guitars, Incorporated: Profit margin Total asset turnover Total debt ratio Payout ratio 1 T Sustainable growth rate - I 4.41% 3.20 .28 26% What is the sustainable growth rate for the company? Note: Do not round intermediate calculations and enter your answer as a percent roundec Answer is complete but not entirely correct. 11.75 %Fill in the table using the following information.Assets required for operation: $4,000Case A—firm uses only equity financingCase B—firm uses 30% debt with an 8% interest rate and 70% equityCase C—firm uses 50% debt with a 12% interest rate and 50% equityIf the answer is zero, enter "0". Round your answers for monetary values to the nearest cent. Round your answers for percentage values to one decimal place. A B C Debt outstanding $ $ $ Stockholders' equity $ $ $ Earnings before interest and taxes $400 $400 $400 Interest expense $ $ $ Earnings before taxes $ $ $ Taxes (40% of earnings) $ $ $ Net earnings $ $ $ Return on stockholders’ equity % % % What happens to the return on the stockholders’ equity as the amount of debt increases? Why did the rate of interest increases in case C? The return on stockholders' equity as the firm becomes financially leveraged. The rate…