Your firm has a debt-equity ratio of 0.60. Your cost of equityis 11 percent and your after-tax cost of debt is 7 percent. Whatwill your cost of equity be if the target capital structurebecomes a 50/50 mix of debt and equity?
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Your firm has a debt-equity ratio of 0.60. Your
is 11 percent and your after-tax cost of debt is 7 percent. What
will your cost of equity be if the target capital structure
becomes a 50/50 mix of debt and equity?
Step by step
Solved in 2 steps
- A levered firm has a pretax cost of debt of 6.8 percent and an unlevered cost of capital of 14 percent. The tax rate is 21 percent and the cost of equity is 17.7 percent. What is the debt-to-equity ratio? O 0.65 0.47 0.41 O 0.52What proportion of a firm is equity financed if the WACC is 14%, the after-tax cost of debt is 7.0%, the tax rate is 35%, and the required return on equity is 17%? (Answer as a whole percentage, i.e. 5.25%, not 0.0525)You have the following information on a company on which to base your calculations and discussion: Cost of equity capital (rE) = 18.55% Cost of debt (rD) = 7.85% Expected market premium (rM –rF) = 8.35% Risk-free rate (rF) = 5.95% Inflation = 0% Corporate tax rate (TC) = 35% Current long-term and target debt-equity ratio (D:E) = 2:5 a. What are the equity beta (bE) and debt beta (bD) of the firm described above?[Hint: Assume that the above costs of capital have been generated by an appropriate equilibrium model.] b. What is the weighted-average cost of capital (WACC) for this firm at the current debt-equity ratio? c. What would the company’s cost of equity capital become if you unlevered the capital structure (i.e. reduced gearing until there is no debt)
- Hilltop Paving has a levered equity cost of capital of 14.92 percent. The debt-to-value ratio is .4, the assumed tax rate is 23 percent, and the pretax cost of debt is 7.2 percent. What is the estimated unlevered cost of equity?The Beta Corporation has an optimal debt ratio of 40 percent. Its cost of equity capital is 12 percent, and its before-tax borrowing rate is 10 percent. Given a marginal tax rate of 35 percent. Required: a. Calculate the weighted-average cost of capital. b. Calculate the cost of equity for an equivalent all-equity financed firm. Complete this question by entering your answers in the tabs below. Required A dA Required B Calculate the weighted-average cost of capital. Note: Do not round intermediate calculations. Round your answer as a percent rounded to 2 decimal places. Weighted-average cost of capitalA firm has an expected return on equity of 16% and an after-tax cost of debt of 8%. What debt-equity ratio should be used in order to keep the WACC at 12%? 0.75:1 1.50:1 O 1:1 0.50:1
- Farma's Llamas has a weighted average cost capital need help this questionGiven the following, determine the firm’s optimal capital structure: Debt/Assets After-Tax Cost of Debt Cost of Equity 0 % 6 % 11 % 10 7 11 20 7 12 30 7 13 40 9 13 50 10 13 60 13 14 Round your answers for capital structure to the nearest whole number and for the cost of capital to one decimal place. The optimal capital structure: % debt and % equity with a cost of capital of % If the firm were using 60 percent debt and 40 percent equity, what would that tell you about the firm’s use of financial leverage? Round your answer for the cost of capital to one decimal place. If the firm uses 60% debt financing, it would be using financial leverage. At that combination the cost of capital is %. The firm could lower the cost of capital by substituting . What two reasons explain why debt is cheaper than equity? Debt is cheaper than equity because interest expense . In addition, equity investors bear risk. If the firm were…Seduak has estimated the costs of debt and equity capital for various proportions of debt in its capital structure. % Debt After-tax cost of debt Cost of equity 0% - 13.0% 10 5.4% 13.3 20 5.4 13.8 30 5.8 14.4 40 6.3 15.2 50 7.0 16.0 60 8.2 17.0 Based on these estimates, determine Seduak’s optimal capital structure
- A firm had a debt ratio of 0.85. The pretax cost of debt is 8% and the reqiured return on asset is 15.5%. What is the cost of equity if we factorin the firms tax rate of 24%? A) 19.53 B) 18.92 C) 21.57 D) 20.35 E) 20.96If a firm now has a debt ratio of 50% but plans to finance with only 40% debt in thefuture, what should it use as wd when it calculates its WACC? Explain.Assume that your company is trying to determine its optimal capital structure, which consists only of debt and common stock. To estimate the cost of debt, the company has produced the following table: 09.86% 9.56% Percent Financed With Debt 10.16% 8.96% 9.26% 0.10 0.20 0.30 0.40 0.50 Percent Financed With Equity 0.90 0.80 0.70 0.60 0.50 Debt/Equity Ratio Now assume that the company's tax rate is 40 percent, that the company uses the CAPM to estimate its cost of common equity, Ks, that the risk-free rate is 5 percent and the market risk premium is 6 percent. Finally assume that if it has no debt its WACC would be equal to its cost of equity which would be equal to 11 percent (you should now be able to determine its "unlevered beta," bu). 0.10/0.90 0.11 0.20/0.80 0.25 Given this information, determine the firm's cost of capital if it finances with 40 percent debt and 60 percent equity. 0.30/0.70=0.43 0.40/0.600.67 0.50/0.50 = 1.00 Bond Rating AA A A BB B Before-Tax Cost of Debt 7.0% 7.2%…
