Find out weighted average cost of capital, Finance Basics

Mermaid Coffee Corporation (MCC) has 1,000,000 shares of stock currently trading at $42 per share. The company has issued 20,000 bonds, each with market value $928.59 and yield to maturity 7%. MCC asset beta is 1.3, the risk free rate is 5%, and the expected market risk premium is 5%.

a. Assuming there are no corporate taxes, what is the firm's weighted average cost of capital (WACC)?

b. Now, assume that a 35% corporate tax rate applies to this firm. All of the information given in the introduction still applies, but your answer to part (a) doesn't necessarily apply. Recalculate the WACC under this assumption and state whether this firm would be willing to invest in a project that costs $1,000,000 today and that will have a net (after-tax) payoff of $1,240,000 exactly one year from now?

(You may assume the project is as risky as the rest of the firm)

 

Posted Date: 3/13/2013 6:25:03 AM | Location : United States







Related Discussions:- Find out weighted average cost of capital, Assignment Help, Ask Question on Find out weighted average cost of capital, Get Answer, Expert's Help, Find out weighted average cost of capital Discussions

Write discussion on Find out weighted average cost of capital
Your posts are moderated
Related Questions
Explain about the functions of financial systems. Financial systems perform the necessary economic function of channelling funds through units who have stored surplus funds to

Constraints of Venture Capital in US 1. Require of rich investors in US, thus inadequate equity capital. 2. Inefficiencies of stock market - NSE is investors and inefficien

Formation of Sole Proprietorship Business When an individual plans to start a business, his or her main objective is to earn profit but there are a number of factors to take in

Managerial Finance Functions Require skilful execution, control and planning of financial activities.  Hence there are four significant managerial finance functions. Such are

Consider an economy with three dates {t=0, 1, 2}. A firm has assets in place that generate an output (profit) of either 40 in state L or 160 in state H at t=2. Bothe states equally

Role of Venture Capital in Economic Development The categories of venture that capitalists might invest will include: a) Business start-ups - Whenever a business has been

MM Dividend Irrelevance Theory Such was advanced via Modigliani and Miller in 1961.  The theory asserts to a firm's dividend policy has no effect on cost of capital and on its

Market For Funds Market for Funds and Financial Institutions in Middle Asia 1. Financial markets refer to an elaborate system of the financial institution and arrange

Advantage of Bill - Source of Finance Advantages of necessitating a Bill as a Source of Finance They are a faster means of raising finance whether drawer is credible.

Agency Theory An agency relationship arises whether one or more parties identified the principal contracts or hires another identified an agent to perform on his behalf some