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

A. 2.0%
B. 2.9%
C. 8.0%
D. 4.5%
E. 6.1%

Please provide spreadsheet to explain work.

Thanks

Solution Preview

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.

A Corp. has no debt but can borrow at 8 %. The firm's WACC is currently 12% and has tax rate of 35%.
a. What is the cost of equity?
b. If the Corp. converts to 25 % debt,what will cost of equity be? 50 %?
c. What is shadow's WACC for part b: 25 % and 50 %.

Suppose a firm is unleveraged and has an unleveraged required return, r, of 15%. The firm borrows 30% of the value of the firm at rd = 8%. Because of the financial leverage, re becomes 18%. The firm pays corporate taxes at a rate of 35% but otherwise operates in perfect capital market. What is the firm's WACC?
a) Assuming th

We are having difficulty figuring out how to determine thewacc. We are attempting to do a merger of two companies and we have the original financial statements; also we have created our own (See attached). Can you please explain how we can at least start the calculations for thewacc of Shang Wa?
Thank you.

WACC, equity from new stock, uses DCF
10. Assume that you are on the financial staff of Christopher Inc., and you have collected the following data: (1) The yield on the companyĆ¢??s outstanding bonds is 7.0%, and its tax rate is 40%. (2) The expected year-end dividend is $0.80 a share, the dividend is expected to grow at a c

ExxonMobil's required return for equity, Re is 14%. Its required return for debt, Rd is 8%, its debt-to-total-value ratio L, is 35%, and its marginal tax rate, T is 40%, calculate its (adjusted WACC)?

If a firm has a balance sheet with 50% debt and 50% equity, cost of debt of 6%, tax rate of 35%, and a cost of equity of 12%, what is the firms weighted average cost of capital?

Capital is one of the most important resources for business firms. It is important for managers to be aware of their cost of capital. To determine cost of capital, an important concept is weighted average cost of capital.
Define Weighted Average Cost of Capital (WACC).
How WACC is calculated ?
Take an example of a large

Suppose Bianca's target capital structure is as follows:
Wd=0.40 Wps=0.10 Wce=0.50;
Its before-tax cost of debt is 8.0%, cost of equity is 12.0%, cost of preferred stock is 8.4%, and the marginal tax rate is 40%. Calculate Bianca's Weighted Average Cost of Capital (WACC).
Please show your work so I can understand ho

A firm has a capital structure with 40% debt, 50% equity, and 10% preferred stock. If the following information is given, calculate company's WACC.
YTM on firm's bond is 7.2%
Beta is 1.2; risk free rate 5%; market risk premium is 5%
Preferred stock pays dividend of $8 and sells for $100

Please show the formulas. Find the Weighted Average Cost of Capital (WACC) of G&W Oil Company. G&W's capital structure is 35% debt paying an 8% interest rate and 65% equity. Investors require a rate of 17% return on G&W's equity. The corporate tax rate is 35%.