Evans Technology has the following capital structure. Debt Common equity 30% 70 The aftertax cost of debt is 7.50 percent, and the cost of common equity (in the form of retained earnings) is 14.50 percent. a. What is the firm's weighted average cost of capital? Note: Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places. Debt Common equity Weighted average cost of capital Weighted Cost % 0.00 % An outside consultant has suggested that because debt is cheaper than equity, the firm should switch to a capital structure that is 50 percent debt and 50 percent equity. Under this new and more debt-oriented arrangement, the aftertax cost of debt is 8.50 percent, and the cost of common equity (in the form of retained earnings) is 16.50 percent. b. Recalculate the firm's weighted average cost of capital. Q Search < Prev 4 of 5 www Next >
Evans Technology has the following capital structure. Debt Common equity 30% 70 The aftertax cost of debt is 7.50 percent, and the cost of common equity (in the form of retained earnings) is 14.50 percent. a. What is the firm's weighted average cost of capital? Note: Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places. Debt Common equity Weighted average cost of capital Weighted Cost % 0.00 % An outside consultant has suggested that because debt is cheaper than equity, the firm should switch to a capital structure that is 50 percent debt and 50 percent equity. Under this new and more debt-oriented arrangement, the aftertax cost of debt is 8.50 percent, and the cost of common equity (in the form of retained earnings) is 16.50 percent. b. Recalculate the firm's weighted average cost of capital. Q Search < Prev 4 of 5 www Next >
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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Concept explainers
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
Question
Transcribed Image Text:Evans Technology has the following capital structure.
Debt
Common equity
30%
70
The aftertax cost of debt is 7.50 percent, and the cost of common equity (in the form of retained earnings) is 14.50 percent.
a. What is the firm's weighted average cost of capital?
Note: Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.
Debt
Common equity
Weighted average cost of capital
Weighted Cost
%
0.00 %
Q Search
An outside consultant has suggested that because debt is cheaper than equity, the firm should switch to a capital structure that is
50 percent debt and 50 percent equity.
Under this new and more debt-oriented arrangement, the aftertax cost of debt is 8.50 percent, and the cost of common equity (in
the form of retained earnings) is 16.50 percent.
b. Recalculate the firm's weighted average cost of capital.
< Prev
4 of 5
h
Next >
O
Che
Transcribed Image Text:An outside consultant has suggested that because debt is cheaper than equity, the firm should switch to a capital structure that is
50 percent debt and 50 percent equity.
Under this new and more debt-oriented arrangement, the aftertax cost of debt is 8.50 percent, and the cost of common equity (in
the form of retained earnings) is 16.50 percent.
b. Recalculate the firm's weighted average cost of capital.
Note: Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.
Debt
Common equity
Weighted average cost of capital
Weighted Cost
%
0.00 %
c. Which plan is optimal in terms of minimizing the weighted average cost of capital?
O Plan A
O Plan B
Q Search
< Prev
4 of 5
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O
Chec
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