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A firm's ordinary shares are trading for $15. The next dividend is $1.20 and is expected to grow by 2% in perpetuity. The firm has issued 10 year annual coupon bonds at a semi- annual yield of 5% pa and a coupon rate of 8% pa. The debt-to-equity ratio is 0.8:1. The corporate tax rate is 30%. What is the firm's after-tax WACC as an effective annual rate? Assume a classical tax system. а. 6.7719% b. 7.8056% С. 7.1306% d. 6.6667% е. 9.1111%

A firm's ordinary shares are trading for $15. The next dividend is $1.20 and is expected to grow by 2% in perpetuity. The firm has issued 10 year annual coupon bonds at a semi- annual yield of 5% pa and a coupon rate of 8% pa. The debt-to-equity ratio is 0.8:1. The corporate tax rate is 30%. What is the firm's after-tax WACC as an effective annual rate? Assume a classical tax system. а. 6.7719% b. 7.8056% С. 7.1306% d. 6.6667% е. 9.1111%

EBK CONTEMPORARY FINANCIAL MANAGEMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter7: Common Stock: Characteristics, Valuation, And Issuance
Section: Chapter Questions
Problem 6P
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A firm's ordinary shares are trading for $15. The next dividend is $1.20 and is expected to grow by 2% in perpetuity. The firm has issued 10 year annual coupon bonds at a semi- annual yield of 5% pa and a coupon rate of 8% pa. The debt-to-equity ratio is 0.8:1. The corporate tax rate is 30%. What is the firm's after-tax WACC as an effective annual rate? Assume a classical tax system. а. 6.7719% b. 7.8056% С. 7.1306% d. 6.6667% е. 9.1111%
Transcribed Image Text:A firm's ordinary shares are trading for $15. The next dividend is $1.20 and is expected to grow by 2% in perpetuity. The firm has issued 10 year annual coupon bonds at a semi- annual yield of 5% pa and a coupon rate of 8% pa. The debt-to-equity ratio is 0.8:1. The corporate tax rate is 30%. What is the firm's after-tax WACC as an effective annual rate? Assume a classical tax system. а. 6.7719% b. 7.8056% С. 7.1306% d. 6.6667% е. 9.1111%
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