Assume that a company borrows at a cost of 0.08. Its tax rate is 0.35. What is the minimum after-tax cost of capital for a certain cash flow if a. 100 percent debt is used? b. 100 percent common stock? (assume that the stockholders will accept 0.08)
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Q: WACC
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A: After tax cost of debt = Pre tax cost of debt * (1 - Tax rate) = 10% * (1 - 30%) = 7%
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Q: what is the WACC?
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- A company currently has a 100% equity structure. Let the current value of the company be approximated by $CV. Assuming corporate taxes exist but personal taxes do not, select the following option that describes the value of the company if the company adds debt to its capital structure. $CV + future value of tax savings on interest $CV + future value of interest savings on tax $CV + present value of tax savings on interest $CV + present value of interest savings on taxAn all equity firm announces that it is going to borrow $11 million in debt and then keep that debt at a constant value relative to the overall value of the company. What would be the appropriate discount rate for the expected interest tax shields generated by this additional debt? A. Required return on debt B. Required return on equity C. Required return on Assets D. WACCYou are given the financial information for the Unic Company: Earnings Before Interest and Tax (EBIT) = $126.58 Corporate tax rate (TC) = 0.21 Debt (D) = $500 Unlevered cost of capital (RU) = 0.20 The cost of debt capital is 10 percent. Question: Determine the value of Unic Company equity? Determine the cost of equity capital for Unic Company? Determine the WACC for Unic Company?
- Which statement is correct?a. The cost of debt is determined by taking the present value of the interest payments and principal times one minus the tax rate.b. The difference in computing the cost of capital between using the accumulated profits and issuance of new ordinary shares is the growth rate.c. Increase in flotation costs, increase in the company’s beta and increase in the expected inflation will all lead to d. increase the company’s weighted average cost of capital.e. Increasing the company’s dividend payout would mitigate the company’s need to raise new ordinary shares.f. none of the aboveWhat is the cost of equity (%)? What is the post-tax cost of debt (%)? What is the WACC (%)? What is the value of the company ($)? What is the price per share ($)?If the state tax rate is 20% and the federal tax rate is 30%, what is the total effective tax rate? a. 34% b. 50% c. 44% d. 37% 2. Holding all other variables constant, which of the following would increase return on equity? An increase in _____________. a. the tax rate b. the equity ratio (equity/total assets) c. total assets d. total asset turnover
- Which of the following statements is CORRECT? Assume a company's target capital structure is 50% debt and 50% common equity. Group of answer choices The WACC is calculated on a before-tax basis. The WACC exceeds the cost of equity. The cost of equity is always equal to or greater than the cost of debt. The cost of reinvested earnings typically exceeds the cost of new common stock. The interest rate used to calculate the WACC is the average after-tax cost of all the company's outstanding debt as shown on its balance sheet.What happens to ROE for Firm U and Firm L if EBIT falls to $1,600? What happens if EBIT falls to $1,200? What is the after-tax cost of debt? What does this imply about the impact of leverage on risk and return?The cost of equity is _______. A. the interest associated with debt B. the rate of return required by investors to incentivize them to invest in a company C. the weighted average cost of capital D. equal to the amount of asset turnover
- If the cost of debt for Sohar Textiles is 8.9% (effective rate) and the after-tax cost of debt is 0.066, what is the tax rate? Select one: a. 0.258 b. 0.023 c. 1.742 d. 0.155 e. All the given choices are not corre The difference between current assets and current liabilities of a business concern is termed as Select one: a. Preferred stocks b. Loans c. None of the options d. Working capital e. BondsYou have been presented with the following information from Bogus Ltd. Source of Capital Book Value Market Value Before-tax cost Long-term debt R11 823 158 R7 389 474 8% Preference shares R118 232 R177 347 13% Ordinary shares R3 103 579 R8 867 368 17% Total R15 044 969 R16 434 189 Assume Bogus Ltd has an average tax rate of 27% Required: a) Calculate the WACC based on the book value weights. Round off answers to two decimal places b) Compare the book value and market value method of calculating the WACC.For a typical firm, which of the following sequences is CORRECT? All rates are after taxes, and assume that the firm operates at its target capital structure rs: Cost of equities new stock issuance re: Cost of equities retained earnings rd: Cost of debts WACC: Weigthed average costs of capital rs > re rd WACC re rs > WACC rd. WACC > re> rs >rd. rd >rers > WACC