Reference no: EM133056367
One of your new employees notes that your debt has a lower cost of capital (5%) than your equity (15%). So, he suggests that the firm swap its capital structure from 30% debt and 70% equity to 70% debt and 30% equity instead. He estimates that after the swap, your cost of equity would be 20%.
What would be your new cost of debt?
Have you lowered your overall cost of capital?
Debt and Taxes
Pelamed Pharmaceuticals had EBIT of $325 million in 2018. In addition, Pelamed had interest expenses of $125 million and a corporate tax rate of 25%.
What was Pelamed's 2018 net income?
What was the total of Pelamed's 2018 net income and interest payments?
If Pelamed had no interest expenses, what would its 2018 net income have been? How does it compare to your answer in part (b)?
What was the amount of Pelamed's interest tax shield in 2018?
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%.
What is Rumolt's pretax WACC?
If Rumolt's corporate tax rate is 21%, what is its after-tax WACC?
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