Find out weighted average cost of capital, Financial Management

Assignment Help:

The Beta Corporation has an optimal debt ratio of 40%. Its cost of equity capital is 12% and its before-tax borrowing rate is 8%.  Given a marginal tax rate of 35%, calculate

(1) The weighted-average cost of capital and,

(2) The cost of equity for an equivalent all-equity financed firm.

Solution: 

(1) K = (1 - .40).12 + (.40).08(1 - .35)      

      = .0928 or 9.28% 

(2) A weighted-average cost of capital of 9.28% for a levered firm implies:       

K =.0928 = Ku (1-(.35)(.40)).  Solving for Ku yields .1079 or 10.79%.


Related Discussions:- Find out weighted average cost of capital

Bankruptcy and bondholder rights, The holder of a corporate debt inst...

The holder of a corporate debt instrument is preferred to equity shareholders in the bankruptcy proceedings. However, secured/senior creditors are preferred to no

Determine the motivation foreign firm - high - tech u.s firm, Currently, ma...

Currently, many foreign firms from both developed and developing countries obtained high-tech U.S. firms. What might have motivated these firms to obtain U.S. firms? Answer: Se

Issuance calendar, Issuance Calendar Issuance calendar gives clear and ...

Issuance Calendar Issuance calendar gives clear and timely information about the borrowing program of the government. It clearly conveys the maturity profile of outstanding sto

Explain the cost of capital across countries, Question 1 Cost of capita...

Question 1 Cost of capital is the minimum rate of return required by a firm on its investment in order to provide the rate of return by its suppliers of capital. Explain the co

Audit opinion, Clean Opinion - AUDIT opinion not qualified for any material...

Clean Opinion - AUDIT opinion not qualified for any material scope restrictions nor departures from GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP). Also called UNQUALIFIED OPINION

Explain adjustments necessary to translate enterprise value, Explain the ad...

Explain the adjustments necessary to translate enterprise value to the total present value of common equity. To acquire the value of the company’s common stock, add the value of

Enumerate the cash flow statement analysis, Cash flow statement analysis ...

Cash flow statement analysis Cash flow statement is a primary financial statement and shows cash generating ability of the organisation. Cash generated from operations can b

Types of finance functions/ decisions, TYPES OF FINANCE FUNCTIONS/ DECISION...

TYPES OF FINANCE FUNCTIONS/ DECISIONS The most main decisions in finance relate to procuring funds, investing them in profitable projects or assets, operate for the year and a

Calculate tax gain or loss, High Tech Production Inc. purchased a comp...

High Tech Production Inc. purchased a computerized measuring device two years ago for $80,000. This equipment falls into the five-year category for MACRS depreciatio

Final Project AFM, Ask questiona) Maju Construction (MCo) Sdn. Bhd. is bidd...

Ask questiona) Maju Construction (MCo) Sdn. Bhd. is bidding on a contract to build four tiny camping house (TCH) a year for the next three years for Sintokian campsite. Each TCH wi

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd