PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 17, Problem 21PS
After-tax WACC Omega Corporation has 10 million shares outstanding, now trading at $55 per share. The firm has estimated the expected
- a. What is Omega’s after-tax WACC?
- b. How much higher would WACC be if Omega used no debt at all? (Hint: For this problem, you can assume that the firm’s overall beta [βA] is not affected by its capital structure or by the taxes saved because debt interest is tax-deductible.)
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The effect of tax rate on WACC K. 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 20% debt, 10% preferred stock, and 70% common stock. The cost of financing with retained earnings is 17%, the cost of preferred stock financing is 12%, and the before-tax cost of debt
financing is 8%. Calculate the weighted average cost of capital (WACC) given a tax rate of 30%.
The firm's WACC is %. (Round to two decimal places.)
Suppose Essen Corp has the following weights and costs. What is the WACC if the
company has a 21% tax rate?
Component
Common equity
Debt (before tax)
R
11.5%
0.8
0.2
7.5%
10.39%
()8.71%
()6.25%
9.50%
10.70%
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Chapter 17 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 17 - Homemade leverage Ms. Kraft owns 50,000 shares of...Ch. 17 - Homemade leverage Companies A and B differ only in...Ch. 17 - Corporate leverage Suppose that Macbeth Spot...Ch. 17 - Corporate leverage Reliable Gearing currently is...Ch. 17 - MMs propositions True or false? a. MMs...Ch. 17 - MMs propositions What is wrong with the following...Ch. 17 - Prob. 7PSCh. 17 - MM proposition 1 Executive Cheese has issued debt...Ch. 17 - Prob. 9PSCh. 17 - Prob. 10PS
Ch. 17 - MM proposition 2 Spam Corp. is financed entirely...Ch. 17 - MM proposition 2. Increasing financial leverage...Ch. 17 - Prob. 13PSCh. 17 - MM proposition 2 Look back to Section 17-1....Ch. 17 - MM proposition 2 Hubbards Pet Foods is financed...Ch. 17 - MM proposition 2 Imagine a firm that is expected...Ch. 17 - MM proposition 2 Archimedes Levers is financed by...Ch. 17 - MM proposition 2 Look back to Problem 17. Suppose...Ch. 17 - Prob. 19PSCh. 17 - After-tax WACC Gaucho Services starts life with...Ch. 17 - After-tax WACC Omega Corporation has 10 million...Ch. 17 - After-tax WACC Gamma Airlines has an asset beta of...Ch. 17 - Prob. 23PSCh. 17 - Investor choice People often convey the idea...Ch. 17 - Investor choice Suppose that new security designs...
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- Shop Right Plc has earnings before interest and tax (EBIT) GHC10 million and there is GHC60 million of debt outstanding with a required rate of return 6.5%. The required rate of return on the industry is 10% and corporate tax is 30%. Assume there are corporate taxes but no personal taxes. Required: 1. Determine the present value of the interest tax shield of Shop Right Plc as well as the total value of the firm 2. Determine the gain from leverage, if personal taxes off 10% on share income and 35% on debt income existsarrow_forwardAssumptions: A company pays 20% income tax. The company is debt-free and its shareholders' return is 10%. The market value of the total share capital is 100 million. The company's management is thinking about changing the capital structure and debting the company for 50 million and using the proceeds of the loan to buy half of the outstanding shares at market value. The interest rate on the loan would be 7%. Question 5. What would be the theoretical total value of the company, V, (enterprise value) after the debt? a. 95 million b. 100 million c. 105 million d. 110 million Question 6. What would be the shareholders' required rate of return, rE, after the leverage? a. 9% b. 10% c. 11% d. 12% Question 7. What would be the company's cost of capital (WACC after tax) after the leverage? a. 8.8% b. 9.1% c. 9.5% d. 10.0%arrow_forwardOmega Corporation has 10.5 million shares outstanding, now trading at $60 per share. The firm has estimated the expected rate of return to shareholders at about 10%. It has also issued long-term bonds at an interest rate of 7% and has a debt value of $225 million. It pays tax at a marginal rate of 21%. a. What is Omega's after-tax WACC? b. What would WACC be if Omega had not to pay taxes and the expected rate of return to shareholders were unchanged? Note: For all requirements, do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. a. After-tax WACC b. WACC % %arrow_forward
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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