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Omega Corporation: What is after-tax WACC

Omega Corporation has 10 million shares outstanding, now trading at $55 per share. The firm has estimated the expected rate of return to shareholders at about 12 percent. It has also issued long-term bonds at an interest rate of 7 percent. It pays tax at a marginal rate of 35 percent.

a. What is Omega's after-tax WACC?
b. How much higher would WACC be if Omega used no debt at all? Hint: For this problem you can assume that the firm's overall beta (βA) is not affected by its capital structure or the taxes saved because debt interest is tax-deductible.

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Omega Corporation has 10 million shares outstanding, now trading at $55 per share. The firm has estimated the expected rate of return to shareholders at about 12 percent. It has also issued long-term bonds at an interest rate of 7 percent. It pays tax at a marginal rate of 35 ...

Solution Summary

This solution is comprised of a detailed explanation to answer what is Omega's after-tax WACC and how much higher would WACC be if Omega used no debt at all.

$2.19