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(Continuation of problem 1) Assuming 0.5 common stock, 0.4 debt, and 0.1 preferred stock, the after-tax WACC of the firm is ____________________. A zero-tax investor holding the proportion of securities given in (a) would earn ___________________

(Continuation of problem 1) Assuming 0.5 common stock, 0.4 debt, and 0.1 preferred stock, the after-tax WACC of the firm is ____________________. A zero-tax investor holding the proportion of securities given in (a) would earn ___________________

Essentials Of Investments
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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chapter 9 #2

  1. (Continuation of problem 1)
    1. Assuming 0.5 common stock, 0.4 debt, and 0.1 preferred stock, the after-tax WACC of the firm is ____________________.
    2. A zero-tax investor holding the proportion of securities given in (a) would earn ____________________.
**The Cost of Capital and Capital Structure** **Problems** 1. **Assume a 0.35 tax rate. To pay 0.10 to investors, a company must earn what return (before tax) if the security is:** - a. Debt? - b. Preferred stock? - c. Common stock? **What after-tax internal rate of return must an investment earn for a corporation to supply sufficient cash flows to pay a before-tax (personal) 0.10 to:** - d. Debtholders? - e. Preferred stockholders? - f. Common stockholders? 2. **(Continuation of problem 1)** - a. Assuming 0.5 common stock, 0.4 debt, and 0.1 preferred stock, the after-tax WACC of the firm is _______________. - b. A zero-tax investor holding the proportion of securities given in (a) would earn _______________. 3. **Assume that a firm has earned before-tax income. The corporate tax rate is 35 percent.** - a. If the security used to finance the investment is $1,000 of 10 percent debt, the firm holding the debt (supplying the debt capital) will earn _______________ after tax. - b. If the security used to finance the investment is $1,000 of 10 percent preferred stock, the corporation holding the preferred stock (supplying the capital) will earn _______________ after tax with a 0.70 dividend received reduction. - c. If the security used to finance the investment is $1,000 of common stock and if the entire after-tax amount of income is paid as a dividend, the corporation holding the common stock will earn _______________ after tax. The firm has earned before-tax income of $1,000. **Navigation Menu:** - **A constant WACC (no taxes)** - **A constant value** - **Levering a firm** - **Taxes** - **Implications of the zero corporate tax model** - **The value of a levered firm with taxes** - **Valuing a firm: capital structure and corporate taxes** - **Personal taxes** - **Conclusions** - **Problems** - **Bibliography**
Transcribed Image Text:**The Cost of Capital and Capital Structure** **Problems** 1. **Assume a 0.35 tax rate. To pay 0.10 to investors, a company must earn what return (before tax) if the security is:** - a. Debt? - b. Preferred stock? - c. Common stock? **What after-tax internal rate of return must an investment earn for a corporation to supply sufficient cash flows to pay a before-tax (personal) 0.10 to:** - d. Debtholders? - e. Preferred stockholders? - f. Common stockholders? 2. **(Continuation of problem 1)** - a. Assuming 0.5 common stock, 0.4 debt, and 0.1 preferred stock, the after-tax WACC of the firm is _______________. - b. A zero-tax investor holding the proportion of securities given in (a) would earn _______________. 3. **Assume that a firm has earned before-tax income. The corporate tax rate is 35 percent.** - a. If the security used to finance the investment is $1,000 of 10 percent debt, the firm holding the debt (supplying the debt capital) will earn _______________ after tax. - b. If the security used to finance the investment is $1,000 of 10 percent preferred stock, the corporation holding the preferred stock (supplying the capital) will earn _______________ after tax with a 0.70 dividend received reduction. - c. If the security used to finance the investment is $1,000 of common stock and if the entire after-tax amount of income is paid as a dividend, the corporation holding the common stock will earn _______________ after tax. The firm has earned before-tax income of $1,000. **Navigation Menu:** - **A constant WACC (no taxes)** - **A constant value** - **Levering a firm** - **Taxes** - **Implications of the zero corporate tax model** - **The value of a levered firm with taxes** - **Valuing a firm: capital structure and corporate taxes** - **Personal taxes** - **Conclusions** - **Problems** - **Bibliography**
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WACC=Wd×Kd+We×Ke+Wp×Kpd=Debtp=Preffered stocke=Common stock

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