FUNDAMENTALS OF CORP.FIN.(LL)-W/CONNECT
FUNDAMENTALS OF CORP.FIN.(LL)-W/CONNECT
10th Edition
ISBN: 9781260848670
Author: BREALEY
Publisher: MCG
Question
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Chapter 13, Problem 1QP

a.

Summary Introduction

To determine: The WACC.

a.

Expert Solution
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Answer to Problem 1QP

The WACC is 11.27%.

Explanation of Solution

Determine the WACC

WACC=[((WeightDebt×RateDebt)×(1Tax))+(WeightPreferredStock×RatePreferredStock)+(WeightEquity×RateEquity)]=[((24.30%×9%)×(10%))+(75.70%×12%)]=[0.02187+0.09084]=0.11271or11.27%

Therefore, the WACC is 11.27%.

b.

Summary Introduction

To determine: The cost of equity after the issue.

b.

Expert Solution
Check Mark

Explanation of Solution

The cost of equity after the issue is as follows:

In Company BO plans and issues a new equity and utilizes the returns to recompense all its debt, then the equity cost will diminish. There will not be any leverage, as a result the equity gets more secure and subsequently orders a lower risk premium. Actually, with all-equity financing, the cost of equity will be equivalent to the company's WACC, which is 11.27%. This is not exactly the previous WACC of 12%.

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