You are provided the following information on a company. The total market value is $40 million. The capital structure, shown here, is considered to be optimal.

Bonds, $1000 par, 7% coupon, 7% YTM $10,000,000 $10,000,000
Preferred Stock, 7%, $100 par, 100,000 shares $10,000,000 $8,000,000
Common Stock, $1 par, 100,000 shares $100,000
Capital in excess of par $400,000 $22,000,000 *
Retained Earnings $13,500,000

* Total market value of common equity

a. What is the after-tax cost of debt? (assume the company's effective tax rate = 40%)

b. Assuming a $7 dividend paid annually, what is the required return for preferred shareholders (i.e. component cost of preferred stock)? (assume flotation costs = $0.00)

c. Assuming the risk-free rate is 3%, the expected return on the stock market is 12%, and the company's beta is 1.0, what is the required return for common stockholders (i.e., component cost of common stock)?

d. What is the company's weighted average cost of capital (WACC)?

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You are provided the following information on a company. The total market value is $40 million. The capital structure, shown here, is considered to be optimal.

Accounting Value Market Value

Bonds, $1000 par, 7% coupon, 7% YTM $10,000,000 $10,000,000
Preferred Stock, 7%, $100 par, 100,000 shares $10,000,000 $8,000,000
Common Stock, $1 par, 100,000 shares $100,000
Capital in excess of par $400,000 $22,000,000 *
Retained Earnings $13,500,000

* Total market value of common equity

a. What is the after-tax cost of debt? (assume the company's effective tax rate = ...

Solution Summary

This solution is comprised of a detailed explanation to answer what is the after-tax cost of debt, what is the required return for preferred shareholders (i.e. component cost of preferred stock), assuming the risk-free rate is 3%, the expected return on the stock market is 12%, and the company's beta is 1.0, what is the required return for common stockholders (i.e., component cost of common stock), and what is the company's weighted average cost of capital (WACC).

First question: What is the proportion of debt financing for a firm that expects a 24% return on equity, a 16% return on assets, and a 12% return on debt? Ignore taxes.
I understand that the answer is 66.7%
I am using the WACC formula WACC = E/V * Re + D/V *Rd * (1-Tc) Where Re = Cost of equity; Rd = cost of debt; E= mark

Smith and Jones Widget company has total capital, consisting of long-term debt and common equity of $80 million. Thirty-two million of total capital is in the form of long-term debt, which carries a cost of 12 percent. The company's equity carries a cost of 19.50 percent. If the company's tax rate is 38 percent, what is the W

I am doing some research on WACC and the effects it has on debt. Can you please help me understand this subject by answering the following questions?
Can one minimize WACC when there is a constraint on raising debt? If so, how?
What are the effects of a corporate tax on the WACC of a business?

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%. What is Mullineaux's 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?

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 %.

The corporation has no debt but can borrow at 7%. The firms WACC is currently 10% with no corporate tax.
1. So what's the cost of equity?
2. Whats the cost of equity at 30% or 60% and what's the WACC?
Thanks for the help!

Copernicus Inc. has determined that its target capital structure will be
60% debt, 10% preferred stock, and 30% common stock. As the financial
manager, the CFO has informed you that the company's before tax cost of
debt is 10%, preferred stock is 14%, and common stock is 16%. In
addition, the company's marginal tax rate

Calculate the WACC for a firm with a debt-equity ratio of 1.5. The debt pays 6% interest and the equity is expected to return 8%. Assume a 35% tax rate and risk-free debt.

The financial manager of a firm determines the following schedules of cost of debt and cost of equity for various combinations of debt financing: Find the WACC.
1.Debt/Assets After-TaxCost of Debt Cost of Equity WACC
0% 4% 8%
10%