the specifics for a company are as follows: tax rate 35% Equity = 6,300,000 Debt = 4000 x 980 = 3,920,000 Loan (new debt) is given as $2,000,000 Preferred stock = 6,000,000 Cost of equity = 10.91% Cost of Debt (annual YTM) = 8.29% After-Tax cost of Debt = YTM x (1-tax rate) = 8.29% x (1- 0.35) = 8.29 x 0.65 = 5.38% After-Tax cost for Loan (new debt) = interest rate x (1-tax rate) = 3.9% Cost of preferred stock = = 7.5% a) To calculate the weighted average cost of capital (WACC) of the company, should the after-tax cost of debt be used or the cost before tax? give reasons for your answer. b) Calculate the WACC of the company.
Financial Ratios
A Ratio refers to a figure calculated as a reference to the relationship of two or more numbers and can be expressed as a fraction, proportion, percentage, or the number of times. When the number is determined by taking two accounting numbers derived from the financial statements, it is termed as the accounting ratio.
Return on Equity
The Return on Equity (RoE) is a measure of the profitability of a business concerning the funds by its stockholders/shareholders. ROE is a metric used generally to determine how well the company utilizes its funds provided by the equity shareholders.
the specifics for a company are as follows:
- tax rate 35%
- Equity = 6,300,000
-
Debt = 4000 x 980 = 3,920,000
- Loan (new debt) is given as $2,000,000
Preferred stock = 6,000,000-
Cost of equity = 10.91% -
Cost of Debt (annual YTM) = 8.29%
-
After-Tax cost of Debt = YTM x (1-tax rate)
= 8.29% x (1- 0.35)
= 8.29 x 0.65 = 5.38%
- After-Tax cost for Loan (new debt) = interest rate x (1-tax rate) = 3.9%
- Cost of preferred stock = = 7.5%
a) To calculate the weighted average cost of capital (WACC) of the company, should the after-tax cost of debt be used or the cost before tax? give reasons for your answer.
b) Calculate the WACC of the company.
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