WACC Calculation
Not what you're looking for?
P1. Longhorn Corporation is a startup company that wishes to calculate its weighted average cost of capital. You have been hired to perform this work, and the CFO has provided the following facts relative to it:
Debt Ratio Equity Ratio Debt Yield (a-tax) Cost of Equity
20% 80% 6.00% 8.50%
40% 60% 7.00% 9.00%
50% 50% 7.50% 11.00%
60% 40% 8.50% 12.00%
80% 20% 10.00% 14.00%
The CFO mentions to you that a debt ratio above 65% could cause more frequent reviews by the credit ratings agencies. The company does not issue preferred stock, and it intends to implement a payout ratio of 0% for at least the next three years. She is asking you to complete the following table so that she can evaluate all options:
Debt Ratio Equity Ratio WACC
20% 80% ?
25% 75%
30% 70%
35% 65%
40% 60%
45% 55%
50% 50%
55% 45%
60% 40%
65% 35%
70% 30%
75% 25%
80% 20%
What capital structure would you recommend (hint: determine the optimal capital structure)? Why?
Purchase this Solution
Solution Summary
This solution is comprised of a detailed explanation to answer the request of the assignment in text file.
Solution Preview
P1. Longhorn Corporation is a startup company that wishes to calculate its weighted average cost of capital. You have been hired to perform this work, and the CFO has provided the following facts relative to it:
Debt Ratio Equity Ratio Debt Yield (after-tax) Cost of Equity
20% 80% 6.00% 8.50%
40% 60% 7.00% 9.00%
50% 50% 7.50% 11.00%
60% 40% 8.50% 12.00%
80% 20% 10.00% 14.00%
The CFO mentions to you that a debt ratio above 65% could cause more frequent reviews by the credit ratings agencies. The company does not issue preferred stock, and it intends to implement a payout ratio of 0% for at least the next three years. She is asking you to complete the following table so that she can evaluate all options:
Debt Ratio Equity Ratio WACC
20% 80% 8.00%
25% 75%
30% 70%
35% 65%
40% 60% 8.20%
45% ...
Purchase this Solution
Free BrainMass Quizzes
Writing Business Plans
This quiz will test your understanding of how to write good business plans, the usual components of a good plan, purposes, terms, and writing style tips.
Situational Leadership
This quiz will help you better understand Situational Leadership and its theories.
Basics of corporate finance
These questions will test you on your knowledge of finance.
Six Sigma for Process Improvement
A high level understanding of Six Sigma and what it is all about. This just gives you a glimpse of Six Sigma which entails more in-depth knowledge of processes and techniques.
Transformational Leadership
This quiz covers the topic of transformational leadership. Specifically, this quiz covers the theories proposed by James MacGregor Burns and Bernard Bass. Students familiar with transformational leadership should easily be able to answer the questions detailed below.