Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 17, Problem 21PS
a)
Summary Introduction
To determine: The company O’s after-tax WACC.
Weighted average cost of capital (WACC) is the appropriate rate at which the firm has to pay to all its security holders to finance its assets.
b)
Summary Introduction
To determine: The amount of higher WACC that company O used no debt at all.
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Students have asked these similar questions
1. Soda Fizz has debt outstanding that has a market
value of $3 million. The company's stock has a book
value of $2 million and a market value of $6 million.
What are the weights in SodaFizz's capital structure?
2. The yield to maturity on Soda Fizz's debt is 7.2%. If
the company's marginal tax rate is 21%, what is
Soda Fizz's effective cost of debt?
3. SodaFizz paid a dividend of $2 per share last year;
its dividend has been growing at a rate of 2% per year,
and that growth rate is expected to continue into the
future. The stock of SodaFizz is currently trading at
$19.50 per share. According to the constant dividend
growth model, what is the cost of equity capital for
Soda Fizz?
5. Given the answers to Problems 1, 2, and 3, what is
SodaFizz's WACC when the constant dividend growth
model is used to calculate its equity cost of capital?
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.)
Omega Corporation has 10.5 million shares outstanding, now trading at $60 per share. The firm has estimated the expected rate of
return to shareholders at about 10%. It has also issued long-term bonds at an interest rate of 7% and has a debt value of $225 million. It
pays tax at a marginal rate of 21%.
a. What is Omega's after-tax WACC?
b. What would WACC be if Omega had not to pay taxes and the expected rate of return to shareholders were unchanged?
Note: For all requirements, do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal
places.
a. After-tax WACC
b. WACC
%
%
Chapter 17 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 17 - Homemade leverage Ms. Kraft owns 50,000 shares of...Ch. 17 - MM proposition 2 Spam Corp. is financed entirely...Ch. 17 - Prob. 3PSCh. 17 - Corporate leverage Suppose that Macbeth Spot...Ch. 17 - MMs propositions True or false? a. MMs...Ch. 17 - MM proposition 2 Look back to Section 17-1....Ch. 17 - Prob. 8PSCh. 17 - Homemade leverage Companies A and B differ only in...Ch. 17 - Prob. 10PSCh. 17 - Prob. 11PS
Ch. 17 - MM proposition 1 Executive Cheese has issued debt...Ch. 17 - MM proposition 2 Hubbards Pet Foods is financed...Ch. 17 - Prob. 14PSCh. 17 - MMs propositions What is wrong with the following...Ch. 17 - Prob. 16PSCh. 17 - Prob. 17PSCh. 17 - MM proposition 2 Imagine a firm that is expected...Ch. 17 - MM proposition 2 Archimedes Levers is financed by...Ch. 17 - Prob. 20PSCh. 17 - Prob. 21PSCh. 17 - Prob. 22PSCh. 17 - Prob. 23PSCh. 17 - Investor choice People often convey the idea...Ch. 17 - Investor choice Suppose that new security designs...
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