Why a company’s actions to increase its operating leverage results in increasing the company’s equity Beta? Explain. Company P’s capital structure contains 10% debt and 90% equity. Company Q’s capital structure contains 50% debt and 50% equity. Both companies pay 8% annual interest on their debt. Shares of Company P has a Beta of 1.1 and the shares of Company Q have a Beta of 1.45. The risk-free rate of interest equals 5%, and the expected return on the market portfolio equals 12%. Required: Refer to the information in (b) above and answer the following questions: Calculate the Weighted Average Cost of Capital (WACC) for both companies assuming there is no taxes. Recalculate the WACC for both companies assuming there is a tax rate of 30% Which company is benefited more for the tax effect on its WACC? Why?
Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
- Why a company’s actions to increase its operating leverage results in increasing the company’s equity Beta? Explain.
- Company P’s capital structure contains 10% debt and 90% equity. Company Q’s capital structure contains 50% debt and 50% equity. Both companies pay 8% annual interest on their debt. Shares of Company P has a Beta of 1.1 and the shares of Company Q have a Beta of 1.45. The risk-free rate of interest equals 5%, and the expected return on the market portfolio equals 12%.
Required: Refer to the information in (b) above and answer the following questions:
- Calculate the Weighted Average Cost of Capital (WACC) for both companies assuming there is no taxes.
- Recalculate the WACC for both companies assuming there is a tax rate of 30%
- Which company is benefited more for the tax effect on its WACC? Why?
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