Question 1:
Company with a target structure of 60% debt and 40% common equity, with no preferred stock. The firm's cost of common equity is 12.5% and its WACC is 8.780%. If the firm's tax rate is 30% what is the before tax yield on this company's long term debt?

A. 8.4%
B. 9.0%
C. 9.8%
D. 8.2%
E. 9.4%

Question 2:
This same company can finance its capital budget and retain earnings throughout the foreseeable future and its stock price is expected to grow at a constant rate. This company long-run sustainable return on equity (ROE) is 15% and the firm expects to maintain payout ratio of 70%. If this company uses the DCF approach to calculate its cost of retained earnings, what is the expected dividend yield on this company's stock

Using the WACC equation
Question 1:
Company with a target structure of 60% debt and 40% common equity, with no preferred stock. The firm's cost of common equity is 12.5% and its WACC is 8.780%. If the firm's tax rate is 30% what is the before tax yield on this company's long term debt?

A. 8.4%
B. 9.0%
C. 9.8%
D. 8.2%
E. 9.4%

Answer: ...

Solution Summary

This solution is comprised of a detailed explanation to answer what is the before tax yield on this company's long term debt.

... the cost of common stock that you would use in the WACC formula? How are the weights derived that are used in the WACC formula? The weighting using the WACC...

... references to the table above and formulas (using the assumptions ... table in part a. In part b, use the MS ... cost per month $1.50 per carton Cartons used per month ...

... Solution Problem 7-21 Instructions Use formulas and the ... to a salvage value of zero using straight-line ... After tax Value Proportions Cost cost WACC Debt FORMULA ...

... Or we can use trial and error using the exact ... debt though approxmate equation gives a good result We will use. ...WACC=weightage of debt x after tax cost of debt ...

... rate of return on equity using equation: rs= KRF + RPM(b) b. Calculate weighted average cost of capital, using equation: WACC = Wdrd(1-%) + wsrs c. Calculate ...

... their options since in practice, there is a tax benefit for using debt therefore ... (2A) There is a formula that can be used to calculate ... (2B) We can use the CAPM ...

... Again your question using #5 equation: ... that is important, because, (a) trade credit is used aggressively by ... an interest or financing charge for such use, and (c ...

... to three decimal places) WACC is computed using the following ... for the interest rate that when used to discount ... We can use trial and error OR Excel's Goal Seek ...

... b. Calculate weighted average cost of capital, using equation: WACC = Wdrd(1-%) + wsrs c. Calculate the value of operations, using equation: Vops = FCF0(1+g ...