Essentials of Corporate Finance
8th Edition
ISBN: 9780078034756
Author: Stephen A. Ross, Randolph W. Westerfield, Bradford D. Jordan
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Chapter 12.2, Problem 12.2ACQ
Summary Introduction
To discuss: The meaning of having a “
Introduction:
The cost of capital refers to the return that the investors expect on a particular investment. In other words, it refers to the compensation demanded by the investors for using their capital.
The cost of equity refers to the
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A firm has two components in its capital structure, debt and equity. The after-tax cost of debt is 3% and the cost of equity is 11%. The proportion of equity in the capital structure is 75%. What is the firm's Weighted Average Cost of Capital?
Select one:
a.
9.47%
b.
8.78%
c.
9.00%
d.
8.37%
A firm's cost of equity Ue) is 25%. Its before-tax cost of debt is 12%, and itsmarginal tax rate is 40%. The firm's capital structure calls for a debt-to-equityratio of 40%. Calculate the firm's cost of capital (k).
The ABC Company has a cost of equity of 21.2 percent, a pre-tax cost of debt of 5.2 percent, and a tax rate of 30 percent. What is the firm's weighted average cost of capital if the proportion of debt is 65.6%?
Chapter 12 Solutions
Essentials of Corporate Finance
Ch. 12.1 - What is the primary determinant of the cost of...Ch. 12.1 - What is the relationship between the required...Ch. 12.2 - Prob. 12.2ACQCh. 12.2 - Prob. 12.2BCQCh. 12.3 - Prob. 12.3ACQCh. 12.3 - Prob. 12.3BCQCh. 12.3 - Prob. 12.3CCQCh. 12.4 - Prob. 12.4ACQCh. 12.4 - Why do we multiply the cost of debt by (1 TC)...Ch. 12.4 - Under what conditions is it correct to use the...
Ch. 12.5 - Prob. 12.5ACQCh. 12.5 - Prob. 12.5BCQCh. 12 - Prob. 12.1CCh. 12 - Prob. 12.2CCh. 12 - Prob. 12.3CCh. 12 - WACC. On the most basic level, if a firms WACC is...Ch. 12 - Prob. 2CTCRCh. 12 - Project Risk. If you can borrow all the money you...Ch. 12 - LO4 12.4WACC and Taxes. Why do we use an aftertax...Ch. 12 - DGM Cost of Equity Estimation. What are the...Ch. 12 - Prob. 6CTCRCh. 12 - Prob. 7CTCRCh. 12 - Prob. 8CTCRCh. 12 - Prob. 9CTCRCh. 12 - Prob. 10CTCRCh. 12 - Prob. 1QPCh. 12 - Prob. 2QPCh. 12 - Prob. 3QPCh. 12 - Prob. 4QPCh. 12 - Prob. 5QPCh. 12 - Prob. 6QPCh. 12 - Prob. 7QPCh. 12 - Prob. 8QPCh. 12 - Prob. 9QPCh. 12 - Prob. 10QPCh. 12 - Prob. 11QPCh. 12 - Prob. 12QPCh. 12 - Prob. 13QPCh. 12 - Prob. 14QPCh. 12 - Prob. 15QPCh. 12 - Prob. 16QPCh. 12 - Prob. 17QPCh. 12 - Prob. 18QPCh. 12 - Prob. 19QPCh. 12 - Prob. 20QPCh. 12 - Prob. 21QPCh. 12 - Prob. 22QPCh. 12 - Prob. 23QPCh. 12 - Prob. 24QPCh. 12 - Prob. 25QPCh. 12 - Prob. 1CCCh. 12 - Prob. 2CCCh. 12 - Prob. 3CCCh. 12 - Prob. 4CCCh. 12 - Prob. 5CC
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- Assume Plainfield Manufacturing has debt of $6,500,000 with a cost of capital of 9.5% and equity of $4,500,000 with a cost of capital of 11.5%. What is Tylers weighted average cost of capital?arrow_forwardOxy Corporation uses debt, preferred stock, and common stock to raise capital. The firm's capital structure targets the following proportions: debt, 49%; preferred stock, 10%; and common stock, 41%. If the cost of debt is 7.3%, preferred stock costs 7.6%, and common stock costs 10.9%, what is Oxy's weighted average cost of capital (WACC)? \ Oxy's weighted average cost of capital (WACC) is ___________%. (Round to two decimal places.)arrow_forwardAssume a capital structure where stock is 50% and costs 14%, bonds are 40% and cost 8% and preferred is 10% and costs 11% what is the weighted average cost of capital when taxes are 25%___________?arrow_forward
- You are given the market values of CHAR's capital structure as follow: $52 million in total common equity, $20 million in debt, and $8 million in preferred stock. CHAR's tax rate is 40%. After-tax cost of debt is 7%, cost of preferred stock is 5.5%, and cost of common equity is 15%. If CHAR's book value capital structure weights are 60% common equity, 25% debt, and 15% preferred stock, what is CHAR's WACC? Show steps by steps in detail.arrow_forwardYou are given the market values of CHAR’s capital structure as follow: $52 million in total common equity, $20 million in debt, and $8 million in preferred stock. CHAR’s tax rate is 40%. After-tax cost of debt is 7%, cost of preferred stock is 5.5%, and cost of common equity is 15%. If CHAR’s book value capital structure weights are 60% common equity, 25% debt, and 15% preferred stock, what is CHAR’s WACC?arrow_forwardParanto company has the following Capital structure: 50% equity, 30% debt; and 20% preferred stock. Their cost of equity has been calculated as 12%, cost of preferred stock is 5% and their after- tax cost of debt is 4% What is the company's weighted average cost of capital? A. 12% B. 8.60% C. 8.20% D. 12.02%arrow_forward
- Blask Technology has the following capital structure: Debt: 35% Preferred Stock: 15 Common Equity: 50 The after-tax cost of debt is 6.5%; the cost of preferred stock is 10% and the cost of common equity is 13.5%. Compute the company's weighted average cost of capital.arrow_forwardA business has a cost of equity of 9.5 percent and a pretax cost of debt of 5.4 percent. The debt - equity ratio is 1.55 and the tax rate is 25 percent. What is the unlevered cost of capital?arrow_forwardA firm has a target capital structure of 45% common stock and 55% debt. It costs of equity is 12.5% and the pretax cost of debt is 7.5%. The relevant tax rate is 23%. What is the firm's WACC?arrow_forward
- The cost of capital for a firm with a 60/40 debt/equity split, 7.6% cost of debt, 15% cost of equity, and a 35% tax rate would bearrow_forwardOxy Corporation uses debt, preferred stock, and common stock to raise capital. The firm's capital structure targets the following proportions: debt, 58% ;preferred stock, 16% and common stock, 26%. If the cost of debt is 6.6% preferred stock costs 7.9% and common stock costs 10.3%, what is Oxy's weighted average cost of capital (WACC)?arrow_forwardA company has a financial structure where equity is 70 % of its total bedt plus equity it's cost of equity is 10 % and gross loan interest is 5% corporate tax is paid 30% what is the company's weighted average cost of capital ?arrow_forward
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