Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd = 11% as long as it finances at its target capital structure, which calls for 50% debt and 50% common equity. Its last dividend (D0) was $3.25, its expected constant growth rate is 3%, and its common stock sells for $22. EEC's tax rate is 40%. Two projects are available: Project A has a
A. What is its
B. What is the WACC? Round your answer to two decimal places. Do not round your intermediate calculations
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- Commonwealth Construction (CC) needs $1 million of assets to get started, and it expects to have a basic earning power ratio of 20%. CC will own no securities, all of its income will be operating income. If it so chooses, CC can finance up to 25% of its assets with debt, which will have a 7% interest rate. If it chooses to use debt, the firm will finance using only debt and common equity, so no preferred stock will be used. Assuming a 25% tax rate on taxable income, what is the difference between CC's expected ROE if it finances these assets with 25% debt versus its expected ROE if it finances these assets entirely with common stock? Round your answer to two decimal places. percentage pointsarrow_forwardKielly Machines Inc. is planning an expansion program estimated to cost $100 million. Kielly is going to raise funds according to its target capital structure shown below. Debt 0.30 Preferred stock 0.24 Equity 0.46 Kielly had net income available to common shareholders of $184 million last year of which 75% was paid out in dividends. The company has a marginal tax rate of 40%. Additional data: The before-tax cost of debt is estimated to be 11%. The market yield of preferred stock is estimated to be 12%. The after-tax cost of common stock is estimated to be 16% What is Kielly's weighted average cost of capital? Select one: a. 14.00% b. 12.22% c. 13.54% d. 13.00%arrow_forwardEmpire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd = 10% as long as it finances at its target capital structure, which calls for 25% debt and 75% common equity. Its last dividend (D 0) was $2.55, its expected constant growth rate is 3%, and its common stock sells for $ 22. EEC's tax rate is 25%. Two projects are available: Project A has a rate of return of 14%, and Project B's return is 8%. These two projects are equally risky and about as risky as the firm's existing assets. What is its cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places. % What is the WACC? Do not round intermediate calculations. Round your answer to two decimal places.arrow_forward
- 3arrow_forwardABC collmpany uses only debt equity. It can borrow unlimited at an interest rate of 10% as long as it finances At its target capital structure, which calls for 50% debt and 50% equity. Its last dividend was $1.46, it's expected constant growth rate is 8% and it's stock still sells for $24. ABC companies tax rate is 21%. Four projects are available project A cost $250 million in return = 13% project B cost 125 milion return = 12% project C cost $200 million and return = 11% project D cost $150 million and return = 10%. 1a) what is ABC Companys cost of common stock? 1b) What is ABC Company's WACC? 1c) What should be the optimal budget?arrow_forwardDuke Inc. is considering to change its capital structure of a $1 million:$3 million debt-equity mix (in terms of market values), by taking out a $3 million loan which is used to pay a large dividend to shareholders. The firm’s tax rate is 40%. After the dividend has been paid, what will be the firm’s total equity value?arrow_forward
- Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd = 10% as long as it finances at its target capital structure, which calls for 40% debt and 60% common equity. Its last dividend (Do) was $2.60, its expected constant growth rate is 4%, and its common stock sells for $30. EEC's tax rate is 25%. Two projects are available: Project A has a rate of return of 11%, and Project B's return is 10%. These two projects are equally risky and about as risky as the firm's existing assets. a. What is its cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places. % b. What is the WACC? Do not round intermediate calculations. Round your answer to two decimal places. -Select- % c. Which projects should Empire accept?arrow_forwardMarcus Inc., a manufacturing firm with no debt outstanding and a market value of $100 million is considering borrowing $ 40 million and buying back stock. Assuming that the interest rate on the debt is 9% and that the firm faces a tax rate of 21%, answer the following question: Estimate the present value of all future interest tax savings, assuming that the debt change is permanent. Group of answer choices a. 21m b. 8.4m c. 0.756m d. 1.89marrow_forward(b) Iron Corporation currently has no debt on its balance sheet. Iron's marginal tax rate is 30% and the cost of debt is 7%. () If Iron were to issue sufficient debt to reduce its taxes by $100 million per year permanently, how much debt would Iron need to issue? What would be the value of the tax shield? (i) Iron plans to borrow $5 billion on a permanent basis through a leveraged recapitalization in which they would use the borrowed funds to repurchase outstanding shares. Investors pay a tax rate of 35% on their interest income and 15% on their income from capital gains and dividends. Calculate the present value of the interest tax shield from this recapitalization from an investor's perspective.arrow_forward
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