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QUESTION 1 (40 marks) Nona Corporation is interested in measuring the cost of each specific type of capital as well as the weighted average cost of capital.. Historically, the firm has raised capital in the following manner: Table of Source of Capital and Its Weight Source of Capital Weight Long Term Debt 15%
) Calculate the after-tax cost of debt (8 marks) c)
Calculate the cost of preferred stock (5 marks) d)
Calculate the cost of retained earnings (5 marks) e)
Calculate the cost of new common stock (7 marks) f)
Demonstrate the firm's weighted average cost of capital
using retained earnings and the capital structure
weights shown in the table above. (6 marks) g)
Demonstrate the firm's weighted average cost of capital
using new common stock and the capital structure
weights shown in the table above. (6 marks)
to generate a solution
a solution
- ff1arrow_forwardRichmond Clinic has obtained the following estimates for its costs of debt and equity at various capital structures: After-Tax Percent Cost of Cost of Debt Debt Equity 0% 16% 20% 6.6% 17% 40% 7.8% 19% 60% 10.2% 22% 80% 14.0% 27% What is the firms optimal capital structure? Please provide your answers in the following format: xx% Note: no decimals required. What percent equity? 15% What percent debt? 40%arrow_forward(Related to Checkpoint 4.2) (Analyzing capital structure) The liabilities and stockholders' equity for Campbell Industries is found here: a. What percentage of the firm's assets does the firm finance using debt (liabilities)? b. If Campbell were to purchase a new warehouse for $1.2 million and finance it entirely with long-term debt, what would be the firm's new debt ratio? a. What percentage of the firm's assets does the firm finance using debt (liabilities)? The fraction of the firm's assets that the firm finances using debt is %. (Round to one decimal place.) Data table (Click on the following icon in order to copy its contents into a spreadsheet.) Accounts payable Notes payable Total current liabilities Long-term debt Total liabilities Total common stockholders' equity Total liabilities and stockholders' equity Print Done $458,000 242,000 $700,000 $1,101,000 1,801,000 $4,513,000 $6,314,000 -arrow_forward
- Please help me with the question correct all parts or pls skiparrow_forwardThe effect of tax rate on WACC K. Bell Jewelers wishes to explore the effect on its cost of capital of the rale at which the compary pays taxes. The firm wishes to maintain a capital structure of40%debt,10%preferred stock,and50%common stock. The cost of financing with retaked eamings is18%, the cost of prefered stock finaneing is 9%, and the before-tax cost of debt financing is7%. Calculate the weighted average cost of capial (WACC) given a tax rate of 35%. The firmis WACC is ?%. (Round to two docinal places)arrow_forwardFINANCE PLEASE ANSWER C & Darrow_forward
- QUESTION 4 A Company with net operating earnings of shs 300,000 is attempting to evaluate a number of possible capital structures, given below. Which of the capital structures will you recommend and why? Show your analysis. Debt After tax-Cost of Cost of equity debt (%) (%) Capital structure 1 2 3 4 5 300,000 10 400,000 10 500,000 11 600,000 12 700,000 14 12 12.5 13.5 15 18 =arrow_forwardNonearrow_forwardEvans Technology has the following capital structure. Debt Common equity 35% 65 The aftertax cost of debt is 7.50 percent, and the cost of common equity (in the form of retained earnings) is 14.50 percent. a. What is the firm's weighted average cost of capital? Note: Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places. Debt Common equity Weighted average cost of capital Weighted Cost % % An outside consultant has suggested that because debt is cheaper than equity, the firm should switch to a capital structure that is 50 percent debt and 50 percent equity. Under this new and more debt-oriented arrangement, the aftertax cost of debt is 8.50 percent, and the cost of common equity (in the form of retained earnings) is 16.50 percent. Debt Common equity Weighted average cost of capital b. Recalculate the firm's weighted average cost of capital. Note: Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal…arrow_forward
- Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following weights: 40% long-term debt, 15% preferred stock, and 45% common stock equity (retained earnings, new common stock, or both). The firm's tax rate is 26%. Debt The firm can sell for $1005 a 13-year, $1,000-par-value bond paying annual interest at a 6.00% coupon rate. A flotation cost of 2.5% of the par value is required. Preferred stock 7.00% (annual dividend) preferred stock having a par value of $100 can be sold for $98. An additional fee of $5 per share must be paid to the underwriters. Common stock The firm's common stock is currently selling for $80 per share. The stock has paid a dividend that has gradually increased for many years, rising from $2.50 ten years ago to the $4.92 dividend payment, D0, that the company just recently made. If…arrow_forwardK. Bell Jewelers wishes to explore 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 30% debt, 20% preferred stock, and 50% common stock. The cost of financing with retained earnings is 13% the cost of preferred stock financing is 9%, and the before-tax cost of debt financing is 7%. Calculate the weighted average cost of capital (WACC) given a tax rate of 21%.arrow_forwarda) Calculate the after-tax cost of debt for each capital structure.arrow_forward
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