In computing the cost of capital, the cost of debt capital is determined by Group of answer choices the capital asset pricing model. interest rate times (1 – the firm’s tax rate) annual interest payment divided by the book value of the debt. annual interest payment divided by the proceeds from debt issuance.

In computing the cost of capital, the cost of debt capital is determined by Group of answer choices the capital asset pricing model. interest rate times (1 – the firm’s tax rate) annual interest payment divided by the book value of the debt. annual interest payment divided by the proceeds from debt issuance.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter13: Capital Structure Concepts

Section: Chapter Questions

Problem 4P

See similar textbooks

Similar questions

Define each of the following terms: Weighted average cost of capital, WACC; after-tax cost of debt, rd(1 – T); after-tax cost of short-term debt, rstd(1 – T) Cost of preferred stock, rps; cost of common equity (or cost of common stock), rs Target capital structure Flotation cost, F; cost of new external common equity, re
The cost of equity is _______. A. the interest associated with debt B. the rate of return required by investors to incentivize them to invest in a company C. the weighted average cost of capital D. equal to the amount of asset turnover
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
Aaron Athletics is trying to determine its optimal capital structure. The company’s capital structure consists of debt and common equity. In order to estimate the cost of capital at various debt levels the company has constructed the following table: Percent financed with debt (wD) Percent financed with equity (ws) Before tax cost of debt 0.10 0.90 7.0% 0.20 0.80 7.2% 0.30 0.70 8.0% 0.40 0.60 8.8% 0.50 0.50 9.6% The company uses the CAPM to estimate its cost of equity, rS . The risk-free rate is 4% and the market risk premium is 5%. Aaron estimates that if it had no debt its beta would be 1.0. (It’s unlevered beta equals 1.0). The company’s tax rate is 40%. On the basis of this information, what is the company’s optimal capital structure, and what is the WACC at that capital structure? (Show your calculations at each debt level).
Calculate the Weighted Average Cost of Capital (WACC) for McCormick and Company using the formula WACC = (WD x RD x (1-T)) + (WS x Rs) Note that -- Rs = the cost of equity Rd = the cost of debt T = the tax rate WD = Value of debt / (Value of debt plus value of equity) WS = Value of equity / (Value of debt plus value of equity) **Note that the weight of debt plus the weight of equity must total to 100%, as there are only two components in the capital structure.** In order to estimate the weights of debt and equity in the total capital structure, the CFO suggests using the book value of debt and the market value of equity. To determine the book value of debt, use data from the year end November 2019 McCormick 10-K. Look on the Balance sheet and add the following -- Short term borrowings, Current portion of long term debt, and Long term debt. To determine the market value of equity, use the following data: On March 17, 2020 the market value of equity (or "Market Cap")…
A company has made the decision to finance next year’s capital projects through debt rather than additional equity. The benchmark cost of capital for these projects should be _________. The before-tax cost of new-debt financing. The after-tax cost of debt financing. The cost of equity financing. The weighted-average cost of capital.
The financial manager of a firm determines the following schedules of cost of debt and cost of equity for various combinations of debt financing: Debt/Assets After-Tax Cost of Debt Cost of Equity 0 % 4 % 8 % 10 4 8 20 4 8 30 5 9 40 6 10 50 8 12 60 10 14 70 12 16 Find the optimal capital structure (that is, optimal combination of debt and equity financing). Round your answers for the 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   % Why does the cost of capital initially decline as the firm substitutes debt for equity financing? The cost of capital initially declines because the firm cost of debt is  than the cost of equity. Why will the cost of funds eventually rise as the firm becomes more financially leveraged? As the firm becomes more financially leveraged and riskier, the cost of…
Given the following, determine the firm’s optimal capital structure: Debt/Assets After-Tax Cost of Debt Cost of Equity 0 % 6 % 10 % 10 6 10 20 6 10 30 8 11 40 8 12 50 10 12 60 12 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 50 percent debt and 50 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 50% 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…
Walnut, Inc. has determined the cost of each of its sources of capital and the desired weighting in the capital structure. See below. What is its weighted average cost of capital?                                                       Source of capital                     Weight                 After‑tax cost          ______________________________________________________          Long‑term debt                          40%                             7%          Preferred stock                           10                               13          Common stock equity                50                               15
General Talc Mines has compiled the following data regarding the market value and cost of the specific sources of capital. Source of Capital Before-Tax Cost Long-term debt 8% Common stock equity 19 Market price per share of common stock $50 (7,200 shares outstanding) Market value of long-term debt is $980 per bond (150 bonds issued at $1,000 par) Tax rate is 20%. What is the weighted average cost of capital using market value weights?
Ilumina Corp is trying to determine its optimal capital structure. The company’s capital structure consists of debt and common stock. In order to estimate the cost of debt, the company has produced the following table: Percent financed with debt (wd) Percent financed with equity (wc) Debt-to-equity ratio (D/S) After-tax cost of debt (%) 0.25 0.75 0.25/0.75 = 0.33 6.9% 0.35 0.65 0.35/0.65 = 0.5385 7.1% 0.50 0.50 0.50/0.50 = 1.00 8.0% The company uses the CAPM to estimate its cost of common equity, rs. The risk-free rate is 5% and the market risk premium is 6%. Ilumina estimates that its beta with 10% debt is 1. The company’s tax rate, T, is 40%. On the basis of this information, what is the company’s optimal capital structure, and what is the firm’s cost of capital at this optimal capital structure? (Please show work)
Webster Company has compiled the information shown in the following table: Source of Capital Book Value Market Value After-Tax Cost Long-Term Debt $4,000,000 $4,200,000 8% Preferred Stock $40,000 $56,000 13% Common Stock Equity $1,060,000 $4,282,000 18% Totals $5,100,000 $8,538,000 A. Calculate the weighted average cost of capital using book value weights. _____%?B. Caclulate the weighted average cost of capital using market value weights. _____%?C. Compare the answers obtained in parts a and b. Explain the differences.