Omega Corporation has 10 million shares outstanding, now trading at $55 per share. The firm has estimated the expected rate of return to shareholders at about 12%. It has also issued $200 million of long-term bonds at an interest rate of 7%. It pays tax at a marginal rate of 35%. a. What is Omega's after-tax WACC? b. How much higher would WACC be if Omega used no debt at all? (Hint: For this problem you can assume that the firm's overall beta [BA] is not affected by its capital structure or by the taxes saved because debt interest is tax-deductible.)

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
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Omega Corporation has 10 million shares outstanding, now trading at $55 per share.
The firm has estimated the expected rate of return to shareholders at about 12%. It
has also issued $200 million of long-term bonds at an interest rate of 7%. It pays tax
at a marginal rate of 35%. a. What is Omega's after-tax WACC? b. How much higher
would WACC be if Omega used no debt at all? (Hint: For this problem you can
assume that the firm's overall beta [BA] is not affected by its capital structure or by
the taxes saved because debt interest is tax-deductible.)
Transcribed Image Text:Omega Corporation has 10 million shares outstanding, now trading at $55 per share. The firm has estimated the expected rate of return to shareholders at about 12%. It has also issued $200 million of long-term bonds at an interest rate of 7%. It pays tax at a marginal rate of 35%. a. What is Omega's after-tax WACC? b. How much higher would WACC be if Omega used no debt at all? (Hint: For this problem you can assume that the firm's overall beta [BA] is not affected by its capital structure or by the taxes saved because debt interest is tax-deductible.)
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