Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 17, Problem 8PS
Summary Introduction
To determine: The new
Cost of equity is the
Weighted average cost of capital is the appropriate rate at which the firm has to pay to all its security holders to finance its assets.
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Gaucho Services starts life with all-equity financing and a cost of equity of 15%. Suppose it refinances to the following market-value capital structure: Debt (D) 46% at rD = 9.6% Equity (E) 54% Use MM’s proposition 2 to calculate the new cost of equity. Gaucho pays taxes at a marginal rate of Tc = 35%. Calculate Gaucho’s after-tax weighted-average cost of capital.
Gaucho Services starts life with all-equity financing and a cost of equity of 14%. Suppose it refinances to the following market-value capital structure:Debt (D) 45% at rD = 9.5%Equity (E) 55%Use MM’s proposition 2 to calculate the new cost of equity. Gaucho pays taxes at a marginal rate of T c = 40%. Calculate Gaucho’s after-tax weighted-average cost of capital.
The Beta Corporation has an optimal debt ratio of 40 percent. Its cost of equity capital is 10 percent, and its before-tax borrowing rate is 7 percent. Given a marginal tax rate of 35 percent.
Required:
A. Calculate the weighted-average cost of capital.
B. Calculate the cost of equity for an equivalent all-equity financed firm.
Chapter 17 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 17 - Homemade leverage Ms. Kraft owns 50,000 shares of...Ch. 17 - MM proposition 2 Spam Corp. is financed entirely...Ch. 17 - Prob. 3PSCh. 17 - Corporate leverage Suppose that Macbeth Spot...Ch. 17 - MMs propositions True or false? a. MMs...Ch. 17 - MM proposition 2 Look back to Section 17-1....Ch. 17 - Prob. 8PSCh. 17 - Homemade leverage Companies A and B differ only in...Ch. 17 - Prob. 10PSCh. 17 - Prob. 11PS
Ch. 17 - MM proposition 1 Executive Cheese has issued debt...Ch. 17 - MM proposition 2 Hubbards Pet Foods is financed...Ch. 17 - Prob. 14PSCh. 17 - MMs propositions What is wrong with the following...Ch. 17 - Prob. 16PSCh. 17 - Prob. 17PSCh. 17 - MM proposition 2 Imagine a firm that is expected...Ch. 17 - MM proposition 2 Archimedes Levers is financed by...Ch. 17 - Prob. 20PSCh. 17 - Prob. 21PSCh. 17 - Prob. 22PSCh. 17 - Prob. 23PSCh. 17 - Investor choice People often convey the idea...Ch. 17 - Investor choice Suppose that new security designs...
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