10. LMB Inc. is looking to invest in new production machinery. The market value of common stock is $44million, the market value of preferred stock is $9 million, and the market value of total debt is $33million. Analysts have calculated the cost of common equity to be 16%, the cost of preferred equity tobe 12%, and the cost of debt to be 9.5%. If the marginal tax rate of LMB Inc. is 34%, then what is theweighted average cost of capital?After TaxBefore TaxAfter TaxRequired Rateof Return forRequired Rateof Return for% Allocation inEach CapitalSourceWeightedAverageRequired Rateof ReturnSources ofMarket Values ofEach CapitalSourceCapitalCapital SourcesEach CapitalSourcekdat-kabr (1-t)CommonStock0.Preferred$Stock0.Debt$0.Weighted Average Costs of Capital (WACC)Total Value$206

Question
Asked Nov 5, 2019
13 views
10. LMB Inc. is looking to invest in new production machinery. The market value of common stock is $44
million, the market value of preferred stock is $9 million, and the market value of total debt is $33
million. Analysts have calculated the cost of common equity to be 16%, the cost of preferred equity to
be 12%, and the cost of debt to be 9.5%. If the marginal tax rate of LMB Inc. is 34%, then what is the
weighted average cost of capital?
After Tax
Before Tax
After Tax
Required Rate
of Return for
Required Rate
of Return for
% Allocation in
Each Capital
Source
Weighted
Average
Required Rate
of Return
Sources of
Market Values of
Each Capital
Source
Capital
Capital Sources
Each Capital
Source
kdat-kabr (1-t)
Common
Stock
0.
Preferred
$
Stock
0.
Debt
$
0.
Weighted Average Costs of Capital (WACC)
Total Value
$
206
help_outline

Image Transcriptionclose

10. LMB Inc. is looking to invest in new production machinery. The market value of common stock is $44 million, the market value of preferred stock is $9 million, and the market value of total debt is $33 million. Analysts have calculated the cost of common equity to be 16%, the cost of preferred equity to be 12%, and the cost of debt to be 9.5%. If the marginal tax rate of LMB Inc. is 34%, then what is the weighted average cost of capital? After Tax Before Tax After Tax Required Rate of Return for Required Rate of Return for % Allocation in Each Capital Source Weighted Average Required Rate of Return Sources of Market Values of Each Capital Source Capital Capital Sources Each Capital Source kdat-kabr (1-t) Common Stock 0. Preferred $ Stock 0. Debt $ 0. Weighted Average Costs of Capital (WACC) Total Value $ 206

fullscreen
check_circle

Expert Answer

Step 1

Hence, weight of equity is 51.16%, which is determined by dividing the equity market value with the total of all sources market value.

help_outline

Image Transcriptionclose

Market value of equity Weight of equity Total market value of all the sources $44 million $86 million -51.16%

fullscreen
Step 2

Hence, weight of preferred stock is 10.46%, which is determined by dividing the preferred stock market value with the total of all sources market value.

help_outline

Image Transcriptionclose

Market value of preferred stock Weight of preferred stock Total market value of all the sources $9 million $86 million =10.46%

fullscreen
Step 3

Hence, weight of debt is 51.16%, which is determined by dividing the ...

help_outline

Image Transcriptionclose

Market value of debt Weight of Debt Total market value of all the sources $33 million $86 million =38.37%

fullscreen

Want to see the full answer?

See Solution

Check out a sample Q&A here.

Want to see this answer and more?

Solutions are written by subject experts who are available 24/7. Questions are typically answered within 1 hour.*

See Solution
*Response times may vary by subject and question.
Tagged in

Business

Finance

Related Finance Q&A

Find answers to questions asked by student like you
Show more Q&A
add
question_answer

Q: Figure 12.11 shows plots of monthly rates of return on three stocks versus the stock market index. T...

A: You have asked a question with five sub parts. I will address the first three. Please post the balan...

question_answer

Q: Meyer & Co. expects its EBIT to be $115,000 every year forever. The firm can borrow at 7 percent...

A: EBIT = $115,000Cost of Equity = 13% or 0.13Tax Rate = 24% or 0.24 Calculation of the Value of the Un...

question_answer

Q: Please show all equations and work as needed. Make the correct answer clear. If possible, please typ...

A: The computation of total number of shares after raising venture capital fund is as follows:As par th...

question_answer

Q: Josh borrowed $500 for 1 year and paid $50 in interest. The bank charged a $5 service charge. What i...

A: Finance charge:Finance charge means the total amount of charges of loan and interest paid throughout...

question_answer

Q: The most recent financial statements for Crosby, Inc., follow. Interest expense will remain constant...

A: Prepared Proforma Income Statement using excel:

question_answer

Q: Gilmore, Inc., had equity of $175,000 at the beginning of the year. At the end of the year, the comp...

A: a) Sustainable growth rate is the rate at which the business would grow. It is calculated by multipl...

question_answer

Q: What are the three forms of Efficient MArket Hypothesis and what are the criticisms of each from the...

A: The Efficient Market Hypothesis means that the market investors have an entree to all information ob...

question_answer

Q: Critically discuss the significance of including the factor of inflation in corporate finance calcul...

A: Inflation in general will impact the cash flows projected and used under capital budgeting analysis....

question_answer

Q: Your company is currently considering two investment projects. Each project requires an upfront expe...

A: Payback period can be defined as the time length required by the project to recover the total cash o...