Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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The L Corp. has determined that its optimal capital structure consists of 40 percent debt and 60 percent equity. Calculate the firm’s weighted average cost of capital (WACC). Assume external equity for
rd before Tax = 8% , Tax = 40% , P0 = $40, Growth = 6% , D0 = $3.00, Flotation cost = 7% of market price
10.64%
13.05%
7.24%
8.61%
9.83%
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- A firm has a capital structure with $75 million in equity and $75 million in debt. The cost of equity capital is 10% and the pretax cost of debt is 7%. If the marginal tax rate of the firm is 35%, compute the weighted average cost of capital of the firm. A. 7.6% B. 7.3% C. 8.4% D. 8.0%arrow_forwardReview this situation: Transworld Consortium Corp. is trying to identify its optimal capital structure. Transworld Consortium Corp. has gathered following financial information to help with the analysis. Debt Ratio 30% 40% 50% 60% 70% Equity Ratio 70% 60% 50% 40% 30% WACC 9.71% 9.55% 10.02% 7.55% 11.30% 10.78% 8.24% 12.80% 11.45% rd Is 6.02% 9.40% 6.75% 9.750% 7.15% 10.60% Which capital structure shown in the preceding table is Transworld Consortium Corp.'s optimal capital structure? Debt ratio= 30%; equity ratio = 70% Debt ratio = Debt ratio = 70%; equity ratio = 30% Debt ratio= 50%; equity ratio = 50% 60%; equity ratio = 40% Debt ratio = 40%; equity ratio = 60%arrow_forwardAssume a capital structure where stock is 50% and costs 14%, bonds are 40% and cost 8% and preferred is 10% and costs 11% what is the weighted average cost of capital when taxes are 25%___________?arrow_forward
- URGENT PLEASE d. Calculate the firm's weighted average cost of capital using the capital structure weights shown in the following table . (Round answer to the nearest 0.01%)arrow_forwardDelta Corporation has the following capital structure: Cost (aftertax)WeightsWeighted CostDebt (Kd)5.5%25%1.38%Preferred stock (Kp)10.5252.63Common equity (Ke) (retained earnings)10.5505.25Weighted average cost of capital (Ka) 9.25% If the firm has $26 million in retained earnings, at what size capital structure will the firm run out of retained earnings? Note: Enter your answer in millions of dollars (e.g., $10 million should be entered as "10". Note: Enter your answer in millions of dollars (e.g., $10 million should be entered as "10".The 5.5 percent cost of debt referred to earlier applies only to the first $18 million of debt. After that the cost of debt will go up. At what size capital structure will there be a change in the cost of debt?arrow_forwardCrowley Company has a capital structure with 30% debt at a 9% interest rate. Its beta is 1.3, the risk-free rate is 1.5%, and the market risk premium is 8%. The company has no preferred stock. Its combined federal-plus-state tax rate is 25%. a. Calculate the company's cost of equity b. Calculate the company's weighted average cost of capital c. Calculate he the company’s unlevered cost of equityarrow_forward
- Your firm has a Return on Assets of 8.00 % , the firm can issue debt at 3.50% regardless of the leverage, and the firm's marginal tax rate is 25% . If the firm'sdebt - to - asset ratio is 24 % , what is the Cost of Equity Capital within the 1963 Miller & Modigliani framework? Group of answer choices9.35% 9.78% 6.77% 9.07% 8.81%arrow_forwardGiven the following information, compute the firm's WACC: • The firm's cost of equity = 16% • The firm's before-tax cost of long-term debt = 7% • The firm's capital structure is 35% long-term debt and 65% common equity • The firm's marginal tax rate = 25% O 10.25% O 12.85% 12.24% O 13.28%arrow_forwardCalculation of individual costs and WACC: 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: 35% long-term debt, 10% preferred stock, and 55% common stock equity (retained earnings, new common stock, or both). The firm's tax rate is 28%. debt The firm can sell for $1010 a 14-year, $1,000-par-value bond paying annual interest at a 7.00% 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 $88. An additional fee of$4 per share must be paid to the underwriters. Common stock The firm's common stock is currently selling for $70 per share. The stock has paid a dividend that has gradually increased for many years, rising from $2.25 ten years ago to the $3.67 dividendpayment, D0, that…arrow_forward
- A company has determined that its optimal capital structure consists of 40 percent debt and 60 percent equity.Given the following information, calculate the firm's cost of capital (WACC).rd= 7%, Tax rate = 40%, P0 = $20, Growth = 0%, D0 =$2.00arrow_forwarda) Calculate the after-tax cost of debt for each capital structure.arrow_forward
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