Antwerp Co. has a debt-to-equity ratio of 1.4, a corporate tax rate of 30%, pays 4% interest on its debt and has a required rate of return on equity of 12%. What is II’s WACC? How much does the debt tax shield reduce II’s WACC? What is the required rate of return on firm assets?
Antwerp Co. has a debt-to-equity ratio of 1.4, a corporate tax rate of 30%, pays 4% interest on its debt and has a required rate of return on equity of 12%. What is II’s WACC? How much does the debt tax shield reduce II’s WACC? What is the required rate of return on firm assets?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Antwerp Co. has a debt-to-equity ratio of 1.4, a corporate tax rate of 30%, pays 4% interest on its debt and has a required rate of
Expert Solution
Step 1
Data given:
Debt-to-equity ratio = 1.4 i.e., D/E= 1.4
Working Note #1
D/E= 1.4
1+D/E = 1+1.4
(E+D)/E = 2.4
or, E/ (E+D) = 1/2.4
Working Note #2
We have E/ (E+D) = 1/2.4
1- E/ (E+D) = 1-1/2.4
(E+D-E) / (E+D) = 1.4/2.4
D/(E+D) = 1.4/2.4
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