Omega Corporation has 10 million shares outstanding, now trading at $55 per share. The firm has determined that its current cost of equity equals 12%. Omega also has $200 million in bonds outstanding with a corresponding bond yield of 7%. Assuming that the firm's marginal tax rate equals 35%, please answer the following two questions: 1) What is Omega Corporation's current cost of capital (or WACC)? 2) What would the cost of capital of Omega Corporation be if the firm used no debt at all? How do you explain the difference with your answer in part (1)?
Omega Corporation has 10 million shares outstanding, now trading at $55 per share. The firm has determined that its current cost of equity equals 12%. Omega also has $200 million in bonds outstanding with a corresponding bond yield of 7%. Assuming that the firm's marginal tax rate equals 35%, please answer the following two questions: 1) What is Omega Corporation's current cost of capital (or WACC)? 2) What would the cost of capital of Omega Corporation be if the firm used no debt at all? How do you explain the difference with your answer in part (1)?
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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Transcribed Image Text:Omega Corporation has 10 million shares
outstanding, now trading at $55 per share. The firm
has determined that its current cost of equity equals
12%. Omega also has $200 million in bonds
outstanding with a corresponding bond yield of
7%. Assuming that the firm's marginal tax rate
equals 35%, please answer the following two
questions:
1) What is Omega Corporation's current cost of
capital (or WACC)?
2) What would the cost of capital of Omega
Corporation be if the firm used no debt
at all? How do you explain the difference with your
answer in part (1)?
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