Purchase Solution

WACC and after-tax cost

Not what you're looking for?

Ask Custom Question

A construction company has 20 year bonds outstanding. The bonds have an 8.5% annual coupon, a face value of $1,000, and they currently sell for $945. The company's stock has a beta equal to 1.20. The market risk premium (km - krf) equals 5%. The risk free rate is 6%. The company has outstanding preferred stock that pays a $2 annual dividend. The preferred stock sells for $25 a share. The company's tax rate is 40%. The company's capital structure consists of 40% long-term debt, 40% common stock, and 20% preferred stock.

1. What is the company's after-tax cost of debt?
2. What is the company's after-tax cost of preferred stock?
3. What is the company's after-tax cost of common equity?
4. What is the company's WACC?

Purchase this Solution
Solution Summary

This solution answers four WACC questions, addressing after-tax costs of debt, preferred stock and common equity.

Solution Preview

The cost of capital can also be viewed as the minimum rate of return required keeping investors satisfied. Thus it is used to know the rate of return expected by the investors.
Cost of capital (WACC)=
(Cost of Equity x Proportion of equity from capital)+ (Cost of debt x Proportion of debt from capital)+ ...

Purchase this Solution
Free BrainMass Quizzes
Team Development Strategies

This quiz will assess your knowledge of team-building processes, learning styles, and leadership methods. Team development is essential to creating and maintaining high performing teams.

Paradigms and Frameworks of Management Research

This quiz evaluates your understanding of the paradigm-based and epistimological frameworks of research. It is intended for advanced students.

Production and cost theory

Understanding production and cost phenomena will permit firms to make wise decisions concerning output volume.

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.

Marketing Management Philosophies Quiz

A test on how well a student understands the basic assumptions of marketers on buyers that will form a basis of their marketing strategies.

View More Free Quizzes
Related BrainMass Solutions

  • WACC

    183596 Calculating WACC. What is Mullineaux's WACC? Mullineaux Corporation has a target capital structure of 55% common stock and 45% debt. Its cost of equity is 16%, and the cost of debt is 9%. The relevant tax rate is 35%.

  • Preferred Stock, WACC, and Cost of Debt

    Then the firm's after-tax cost of debt will equal its before-tax cost of debt. Why?

  • Calculate the Weighted-Average Cost of Capital (WACC)

    452928 Calculate the Weighted-Average Cost of Capital (WACC) GII capital structure is 75% equity based and 25% debt based. GII is in the 25% marginal tax bracket in France and has a cost of equity of 18% and an average debt cost of 7%.

  • WACC before and after issue of debt

    The new WACC is less than the pre debt WACC This is because debt offers a tax shield and therefore reduces WACC Calculates WACC before and after issue of debt.

  • Weighted Average Cost of Capital (WACC)

    225937 Weighted Average Cost of Capital (WACC).. 4. (P10-9) WACC The Patrick Company's cost of common equity is 16 percent, its before-tax cost of debt is 13 percent, and its marginal tax rate is 40 percent. The stock sells at book value.

  • WACC

    After Tax Cost = Before tax cost X (1-taxrate) After tax cost = 12% X (1-0.38) = 7.44% Cost of equity is 19.50% WACC = 0.40X7.44%+ 0.60 X 19.50% WACC = 14.676% The solution explains how to calculate the WACC.

  • WACC: Weighted Average Cost of Capital

    WACC = cost of equity* equity ratio + after tax cost of debt *debt ratio 0.105= 0.165*0.5525+ after tax cost of debt *0.4475 After tax cost of debt = (0.105 -0.165*0.5525)/0.4475 After tax cost of debt = 0.030921788

  • Calculate cost of capital

    Cost of capital = risk free rate+beta*market premium = 10%+0.5*8%=14% After-tax WACC = Cost of capital*E/(D+E)+(1-tax rate)*Cost of debt*D/(D+E) = 14%*60%+(1-35%)*10%*40% = 11% (D = Debt, E = Equity) Provides steps necessary to calculate after-tax

  • Weighted Average Cost of Capital

    The company should use more of debt as after tax cost of debt is 5.2% only (8%*(1-0.35)). When considering option for capital structure one need to look at after tax cost of debt. Because interest expenses are tax deductile.

  • WACC

    WACC = Proportion of debt X after tax cost of debt + Proportion of equity X cost of equity We are given Proportion of debt = 40% So the proportion of equity = 60% (since total capital is debt + equity) After tax cost of debt = 9% Cost of equity =

View More Related Solutions