Kareem Construction Company has the following amounts of interest-bearing debt and common equity capital:262 Part 3: Planning for the FutureCopyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.FINANCINGSOURCEDOLLARAMOUNTINTERESTRATECOST OFCAPITALShort-term loan $200,000 12%Long-term loan $200,000 14%Equity capital $600,000 22%Kareem Construction is in the 30 percent average tax bracket.A. Calculate the after-tax WACC for Kareem.B. Show how Kareem’s WACC would change if the tax rate dropped to 25 percent and the estimated cost of equity capital were based on a risk-free rate of 7 percent, a market risk premium of 8 percent, and a systematic risk measure or beta of 2.0.
Kareem Construction Company has the following amounts of interest-bearing debt and common equity capital:
262 Part 3: Planning for the Future
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
FINANCING
SOURCE
DOLLAR
AMOUNT
INTEREST
RATE
COST OF
CAPITAL
Short-term loan $200,000 12%
Long-term loan $200,000 14%
Equity capital $600,000 22%
Kareem Construction is in the 30 percent average tax bracket.
A. Calculate the after-tax WACC for Kareem.
B. Show how Kareem’s WACC would change if the tax rate dropped to 25 percent and the estimated
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