1) A company is 40% financed by risk- free debt. The interest rate is 10%, the expected market risk premium is 8%, and the beta of the company's common stock is 0.5. What is the company cost of capital? What is the after- tax WACC, assuming that the company pays tax at a 35% rate?

Solution Preview

The first step in calculating the after-tax WACC is calculating the cost of each component of the WACC.

The WACC is equal to the cost of each component multiplied by its weight (proportion of financing provided by that component).

First, we will calculate the after-tax cost of debt. This is equal to the interest rate (which is the cost) multiplied by 1 minus the tax rate. ...

Solution Summary

The question provides the percentage of debt in the company's capital structure, the interest rate, the market risk premium, the tax rate, and the company's common stock beta. This information is used to calculate the company cost of capital and the after-tax weighted average cost of capital (WACC).

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

You were hired as a consultant to Kroncke Company, whose target capital structure is 40% debt, 10% preferred, and 50% common equity. The after-tax cost of debt is 6.00%, the cost of preferred is 7.50%, and the cost of retained earnings is 13.25%. The firm will not be issuing any new stock. What is its WACC?
a. 9.4

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

If a firm's capital structure is 40% debt, 10% preferred stock, and 50% common stock, their tax rate is 40%, and this Kd = 9%, Kp = 5%, and Ks = 12%, what is the firm's WACC? Also, show the formula and entries on a financial calculator.

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

a. What is meant by Weighted Average Cost of Capital (WACC)?
b. What are the components of WACC?
c. Why is WACC a more appropriate discount rate when doing capital budgeting?
d. What is the impact on WACC when an organization needs to raise long term capital?

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. What is Weighted Average Cost of Capital (WACC)? Identify TWO (2) factors that affect
the WACC of a company.
1- Using debt can help reduce the agency problem that may arise between the
management of a companyand its shareholders. Explain.
2- Explain the effects of the following on the company's weighted averag

Determine the weighted average cost of capital (WACC) for the XYZ Company that will finance its optimal capital budget with $120 million of long-term debt (kd = 12.5%) and 180 million in retained earnings (ke = 16%). XYZ present capital is considered optimal. The marginal tax rate is 40%.