Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
Chapter 15, Problem 11P
Rumolt Motors has 30 million shares outstanding with a price of $15 per share. In addition, Rumolt has issued bonds with a total current market value of $150 million. Suppose Rumolt’s equity cost of capital is 10%, and its debt cost of capital is 5%.
- a. What is Rumolt’s pretax weighted average cost of capital?
- b. If Rumolt’s corporate tax rate is 35%, what is its after-tax weighted average cost of capital?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Rumolt Motors has 54 million shares outstanding with a share price of $27 per share. In addition, Rumolt has issued
bonds with a total current market value of $417 million. Suppose Rumolt's equity cost of capital is 9%, and its debt cost
of capital is 5%.
a. What is Rumolt's pre-tax WACC?
b. If Rumolt's corporate tax rate is 25%, what is its after-tax WACC?
a. What is Rumolt's pre-tax WACC?
Rumolt's pre-tax WACC is%. (Round to two decimal places.)
Munding Corp. has debt with a market value of $23 million and equity with a market value of $45 million. Its pre-tax cost of debt is 5% and its cost of equity is 14%. The firm's marginal tax rate is 21%.
1. What is the company's weighted average cost of capital?
Fama's Llamas has a weighted average cost of
capital of 10 percent. The company's cost of
equity is 14 percent and its pretax cost of debt
is 7.5 percent. The tax rate is 25 percent. What
is the company's debt-equity ratio?
Chapter 15 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Ch. 15.1 - With corporate income taxes, explain why a firms...Ch. 15.1 - Prob. 2CCCh. 15.2 - With corporate taxes as the only market...Ch. 15.2 - How does leverage affect a firms weighted average...Ch. 15.3 - How can shareholders benefit from a leveraged...Ch. 15.3 - How does the interest tax shield enter into the...Ch. 15.4 - Prob. 1CCCh. 15.4 - How does this personal tax disadvantage of debt...Ch. 15.5 - How does the growth rate of a firm affect the...Ch. 15.5 - Do firms choose capital structures that fully...
Ch. 15 - Prob. 1PCh. 15 - Grommit Engineering expects to have net income...Ch. 15 - Suppose the corporate tax rate is 40%. Consider a...Ch. 15 - Braxton Enterprises currently has debt outstanding...Ch. 15 - Your firm currently has 100 million in debt...Ch. 15 - Arnell Industries has just issued 10 million in...Ch. 15 - Prob. 7PCh. 15 - Prob. 8PCh. 15 - Safeco Inc. has no debt, and maintains a policy of...Ch. 15 - Rogot Instruments makes fine violins and cellos....Ch. 15 - Rumolt Motors has 30 million shares outstanding...Ch. 15 - Summit Builders has a market debt-equity ratio of...Ch. 15 - NatNah, a builder of acoustic accessories, has no...Ch. 15 - Restex maintains a debt-equity ratio of 0.85, and...Ch. 15 - Acme Storage has a market capitalization of 100...Ch. 15 - Milton Industries expects free cash flow of 5...Ch. 15 - Prob. 17PCh. 15 - Kurz Manufacturing is currently an all-equity firm...Ch. 15 - Rally, Inc., is an all-equity firm with assets...Ch. 15 - Prob. 20PCh. 15 - Facebook, Inc. had no debt on its balance sheet in...Ch. 15 - Markum Enterprises is considering permanently...Ch. 15 - Garnet Corporation is considering issuing...Ch. 15 - Suppose the tax rate on interest income is 35%,...Ch. 15 - With its current leverage, Impi Corporation will...Ch. 15 - Colt Systems will have EBIT this coming year of 15...Ch. 15 - PMF, Inc., is equally likely to have EBIT this...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Planet Express has liabilities of $400 and assets of $1000. The average YTM on its debt is 10% and the tax rate is 20%. The company has announced $1 annual dividends in perpetuity and has a stock price of $5. What is the company’s weighted average cost of capital (WACC)? Why is the tax rate included in the WACC? How can the WACC be used to evaluate potential investments?arrow_forwardSuppose you are estimating the WACC for Columbus Inc. It has the following data from its balance sheet: total debt = $200 million; total equity=$120 million. It has 20 million shares outstanding, and its stock is trading at $32 per share. Your analysis shows that the company's current borrowing rate is 7%, and that the cost of equity is 13%. If the company marginal tax rate is 30%, what is its WACC?arrow_forwardCompany X has debt and equity as sources of funds. Company X has market value of debtas $150,000 and book value of debt as $80,000. The company has book value of equity as$100,000 and market value of equity as $125,000. The cost of debt is 8.25% and cost ofequity is 9.57%. the tax rate is 38%. What is the Weighted Average Cost of Capital(WACC)?a. 7.59%b. 7.78%c. 7.14%d. 7.68%arrow_forward
- ← Unida Systems has 35 million shares outstanding trading for $12 per share. In addition, Unida has $95 million in outstanding debt. Suppose Unida's equity cost of capital is 16%, its debt cost of capital is 8%, and the corporate tax rate is 38%. a. What is Unida's unlevered cost of capital? b. What is Unida's after-tax debt cost of capital? c. What is Unida's weighted average cost of capital? a. What is Unida's unlevered cost of capital? Unida's unlevered cost of capital is%. (Round to two decimal places.)arrow_forwardUnida Systems has 35 million shares outstanding trading for $11 per share. In addition, Unida has $87 million in outstanding debt. Suppose Unida's equity cost of capital is 14%, its debt cost of capital is 7%, and the corporate tax rate is 40%. a. What is Unida's unlevered cost of capital? b. What is Unida's after-tax debt cost of capital? c. What is Unida's weighted average cost of capital? a. What is Unida's unlevered cost of capital? Unida's unlevered cost of capital is 12.7%. (Round to one decimal place.) b. What is Unida's after-tax debt cost of capital? Unida's after-tax debt cost of capital is 4.2%. (Round to one decimal place.) c. What is Unida's weighted average cost of capital? Unida's weighted average cost of capital is %. (Round to one decimal place.)arrow_forwardUsing the WACC in practice: Maloney’s, Inc., has found that its cost of common equity capital is 17 percent and its cost of debt capital is 6 percent. If the firm is financed with $3,000,000 of common shares (market value) and $2,000,000 of debt, then what is the after-tax weighted average cost of capital for Maloney’s if it is subject to a 40 percent marginal tax rate? 8.96% 11.16% 11.64% 12.60%arrow_forward
- Unida Systems has 46 million shares outstanding trading for $12 per share. In addition, Unida has $85 million in outstanding debt. Suppose Unida's equity cost of capital is 13%, its debt cost of capital is 8%, and the corporate tax rate is 28%. a. What is Unida's unlevered cost of capital? b. What is Unida's after-tax debt cost of capital? c. What is Unida's weighted average cost of capital? a. What is Unida's unlevered cost of capital? Unida's unlevered cost of capital is %. (Round to two decimal places.)arrow_forwardUnida Systems has 34 million shares outstanding trading for $8 per share. In addition, Unida has $94 million in outstanding debt. Suppose Unida's equity cost of capital is 14%, its debt cost of capital is 9%, and the corporate tax rate is 40%. a. What is Unida's unlevered cost of capital? b. What is Unida's after-tax debt cost of capital? c. What is Unida's weighted average cost of capital?arrow_forwardWilmore Company Limited is a levered entity with percentage of debt out of total capital being 40%. If the interest rate on a bank loan is 10%, the tax rate is 20%, and the cost of equity is as computed in (a), what will be the after tax cost of debt?arrow_forward
- P&G has the following capital structure: $2 million in debt, $5 million in preferred stock and $7 million in equity. If the company’s before-tax cost of debt is 6%, cost of preferred stock is 9% and cost of equity is 15%, what is weighted average cost of capital (in %) for P&G? Assume that P&G’s tax rate is 30%. WACC = ____________%arrow_forwardCompany X has debt and equity as sources of funds. Company X has market value of debt as $150,000 and book value of debt as $80,000. The company has book value of equity as $100,000 and market value of equity as $125,000. The cost of debt is 8.25% and cost of equity is 9.57%. the tax rate is 38%. What is the Weighted Average Cost of Capital (WACC)? a. 7.59% b. 7.78% c. 7.14% d. 7.68%arrow_forwardCompute the WACC of a firm that currently has $1 million in debt and $2 million in equity and $1 million in preferred stock. The current yield to maturity on the firms debt is 2%. Equity holders require a 6% return and preferred stock holders require a 3.8% return. The current tax rate that applies to the firm is 30%. Write your answer as a decimal.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
What is WACC-Weighted average cost of capital; Author: Learn to invest;https://www.youtube.com/watch?v=0inqw9cCJnM;License: Standard YouTube License, CC-BY