Fundamentals Of Corporate Finance, 9th Edition
9th Edition
ISBN: 9781260052220
Author: Richard Brealey; Stewart Myers; Alan Marcus
Publisher: McGraw-Hill Education
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Chapter 13, Problem 3QP
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To compute: The weighted average cost of capital (WACC) of the company.
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The user cost of capital: Consider the basic formula for the user cost ofcapital in the presence of a corporate income tax. Suppose the baseline casefeatures an interest rate of 2 percent, a rate of depreciation of 6 percent, aprice of capital that rises at 1 percent per year, and a 0 percent corporate taxrate. Starting from this baseline case, what is the user cost of capital after thefollowing changes?(a) No changes—the baseline case.(b) Te corporate tax rate rises to 35 percent.(c) Te interest rate doubles to 4 percent.(d) Both (b) and (c).
Suppose that MNINK industries' capital structure features 63 percent equity, 7 percent preferred stock, and 30 percent debt. If the before-tax component costs of equity, preferred stock, and debt are 11.60 percent, 9.5 percent, and 9 percent, respectively, what is MNINK's WACC if the firm faces an average tax rate of 21 percent and can make full use of the interest tax shield?
Suppose that B2B, Incorporated has a capital structure of 37 percent
equity, 17 percent preferred stock, and 46 percent debt. Assume the
before-tax component costs of equity, preferred stock, and debt are
15.0 percent, 12.0 percent, and 10.0 percent, respectively.
What is B2B's WACC if the firm faces an average tax rate of 21
percent and can make full use of the interest tax shield?
Note: Round your answer to 2 decimal places.
WACC
%
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Fundamentals Of Corporate Finance, 9th Edition
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- Silver Corporation has the following liabilities and equity balances. <See image attached.> If it is taxed at 25%, what is the weighted average cost of capital?arrow_forwardSuppose that MNINK Industries' capital structure features 63 percent equity, 8 percent preferred stock, and 29 percent debt. Assume the before-tax component costs of equity, preferred stock, and debt are 11.40 percent, 9.30 percent, and 8.00 percent, respectively. What is MNINK's WACC if the firm faces an average tax rate of 21 percent and can make full use of the interest tax shield? (Round your answer to 2 decimal places.) Answer is complete but not entirely correct. WACC 9.50arrow_forwardSuppose that JB Cos. has a capital structure of 78 percent equity, 22 percent debt, and that its before-tax cost of debt is 12 percent while its cost of equity is 16 percent. Assume the appropriate weighted-average tax rate is 21 percent and JB estimates that they can make full use of the interest tax shield.What will be JB’s WACC? (Round your answer to 2 decimal places.) WACC: ___.__%arrow_forward
- Suppose that MNINK Industries' capital structure features 63 percent equity, 7 percent preferred stock, and 30 percent debt. Assume the before-tax component costs of equity, preferred stock, and debt are 11.60 percent, 9.50 percent, and 9 percent, respectively. What is MNINK's WACC if the firm faces an average tax rate of 21 percent and can make full use of the interest tax shield? (Round your answer to 2 decimal places.) WACC %arrow_forwardSuppose that MNINK Industries’ capital structure features 63 percent equity, 8 percent preferred stock, and 29 percent debt. Assume the before-tax component costs of equity, preferred stock, and debt are 11.60 percent, 9.50 percent, and 9.00 percent, respectively.What is MNINK’s WACC if the firm faces an average tax rate of 21 percent and can make full use of the interest tax shield? (Round your answer to 2 decimal places.) WACC: ____.__%arrow_forwardSuppose that MNINK Industries’ capital structure features 63 percent equity, 8 percent preferred stock, and 29 percent debt. Assume the before-tax component costs of equity, preferred stock, and debt are 11.40 percent, 9.30 percent, and 8.00 percent, respectively.What is MNINK’s WACC if the firm faces an average tax rate of 21 percent and can make full use of the interest tax shield? (Round your answer to 2 decimal places.)arrow_forward
- uppose that MNINK Industries’ capital structure features 65 percent equity, 6 percent preferred stock, and 29 percent debt. Assume the before-tax component costs of equity, preferred stock, and debt are 11.70 percent, 9.60 percent, and 9.00 percent, respectively.What is MNINK’s WACC if the firm faces an average tax rate of 21 percent and can make full use of the interest tax shield? (Round your answer to 2 decimal places.)arrow_forwardSuppose that B2B, Inc. has a capital structure of 35 percent equity, 16 percent preferred stock, and 49 percent debt. Assume the before-tax component costs of equity, preferred stock, and debt are 14.0 percent, 10.0 percent, and 9.0 percent, respectively. What is B2B’s WACC if the firm faces an average tax rate of 30 percent? (Round your answer to 2 decimal places.)arrow_forwardIf Bulldogs Inc. pays taxes at the rate of 40%, what is the firm’s weighted average cost of capital? (In percentage, type the percentage sign on your answer)arrow_forward
- Your company has a pre-tax cost of debt of 6%. You anticipate the corporate tax rate will go from 21% to 28% in the near future. What impact will the tax change have on your debt cost of capital as an input to your overall cost of capital?arrow_forwardHow should the capital structure weights used to calculate the WACC be determined? Suppose a firm estimates its WACC to be 10%. Should the WACC be used to evaluate all of its potential projects, even if they vary in risk? If not, what might be “reasonable” costs of capital for average-, high-, and low-risk projects? If Congress increased the personal tax rate on interest, dividends, and capital gains but simultaneously reduced the rate on corporate income, what effect would this have on the average company’s capital structure? If a firm goes from zero debt to successively higher levels of debt, why would you expect its stock price to rise first, then hit a peak, and then begin to decline?arrow_forwardHatter Inc. has the following capital components and costs. Calculate Hatter's WACC. (The answer choice without supporting calculation will not earn any points). Component Value CostDebt 15,500 10% (after tax)Preferred Stock 7,500 12%Common Equity 10,000 14%arrow_forward
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What is WACC-Weighted average cost of capital; Author: Learn to invest;https://www.youtube.com/watch?v=0inqw9cCJnM;License: Standard YouTube License, CC-BY