Question

In: Finance

Country Markets has an unlevered cost of capital of 11.45 percent, a tax rate of 35...

Country Markets has an unlevered cost of capital of 11.45 percent, a tax rate of 35 percent, and expected earnings before interest and taxes of $18,700. The company has $11,000 in bonds outstanding that have an 8 percent coupon and pay interest annually. The bonds are selling at par value. What is the value of WACC?

Solutions

Expert Solution

Value of unlevered firm = EBIT (1-tax rate) / cost of capital

= 18,700 (1-0.35) / 0.1145

= 18,700 (0.65) / 0.1145

= 12,155 / 0.1145

= $106,157.205

Value of levered firm= value of unlevered firm + tax × value of debt

= 106,157.205 + 11,000(0.35)

= 106,157.205 + 11,000 (0.35)

= 106,157.205 + 3,850

= $110,007.205

Value of equity = value of levered firm - value of debt

= 110,007.205 - 11,000

= $99,007.205

Return on equity = cost of unlevered firm + (cost of unlevered firm - cost of debt) × debt/equity × (1-tax rate)

= 0.1145 + (0.1145 - 0.08) × 11,000 / 99,007.205 × (1 - 0.35)

= 0.1145 + (0.0345) × 0.11 × 0.65

= 0.1145 + 0.00249

= 0.1170 or 11.70%

Weight of debt = 11,000 / 110,007.205 = 10%

Weight of equity = (1-weight of debt)

= (1 - 0.10)

= 90%

Wacc= Weight of debt × Cost of debt (1-tax rate) + weight of equity × cost of equity

= 0.10 × 8% (1-0.35) + 0.90 × 11.70%

= 0.10 × 8% (0.65) + 10.53%

= 0.10 × 5.2% + 10.53%

= 0.52% + 10.53%

= 11.05%

Therefore the WACC is 11.05%

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

XYZ Co. has an unlevered cost of capital of 20%, a tax rate of 20% percent,...

XYZ Co. has an unlevered cost of capital of 20%, a tax rate of 20% percent, and expected earnings before interest and taxes of $400,000 (in perpetuity). The company has outstanding bonds with a market value of $1 million, and a yield of 6%. What is the cost of equity? A. 15.64% B. 16.42% C. 25.12% D. 38.67% E. none of the above

Anderson's Furniture Outlet has an unlevered cost of capital of 10%, a tax rate of 34%,...

Anderson's Furniture Outlet has an unlevered cost of capital of 10%, a tax rate of 34%, and expected earnings before interest and taxes of $1,600. The company has $3,000 in bonds outstanding that have an 8% coupon and pay interest annually. The bonds are selling at par value. What is the cost of equity? a. 8.67% b. 10.46% c. 9.72% d. 9.34% e. 9.99%

Coffeez has expected EBIT of $21,300. It has an unlevered cost of capital of 14.2 percent,...

Coffeez has expected EBIT of $21,300. It has an unlevered cost of capital of 14.2 percent, and debt with both a book and face value of $113,200. The coupon rate of debt is 10.15 percent and the tax rate is 21 percent. What is the value of this company? Group of answer choices 184,356 176,002 139,555 142,272 154,260

An unlevered firm has a cost of capital of 13.6 percent and earnings before interest and...

An unlevered firm has a cost of capital of 13.6 percent and earnings before interest and taxes of $138,000. A levered firm with the same operations and assets has both a book value and a face value of debt of $520,000 with an annual coupon of 7 percent. The applicable tax rate is 21 percent. What is the value of the levered firm? Multiple Choice $996,421 $907,679 $1,184,929 $910,818 $1,191,506

An unlevered firm has a cost of capital of 13.6 percent and earnings before interest and...

Unlevered Cost of Equity Elliott's Cross Country Transportation Services has a capital structure with 30% debt...

Unlevered Cost of Equity Elliott's Cross Country Transportation Services has a capital structure with 30% debt at an 8% interest rate. Its beta is 1.5, the risk-free rate is 4%, and the market risk premium is 9%. Elliott's combined federal-plus-state tax rate is 25%. What is Elliott's cost of equity? Do not round intermediate calculations. Round your answer to two decimal places. %_____ What is its weighted average cost of capital? Do not round intermediate calculations. Round your answer to...

The unlevered cost of capital is ____________ Select one: a. the cost of capital for a...

The unlevered cost of capital is ____________ Select one: a. the cost of capital for a firm with no debt in its capital structure. b. the cost of capital for a firm with no equity in its capital structure. c. the cost of preferred stock for a firm with equal parts debt and common stock in its capital structure. d. the interest tax shield times pretax net income. e. equal to the profit margin for a firm with some debt...

Delayed Exports has four bonds outstanding. If the relevant tax rate is 35 percent, what is...

Delayed Exports has four bonds outstanding. If the relevant tax rate is 35 percent, what is the after-tax cost of Delayed Exports' debt ? (Do not round your intermediate calculations.) Bond Coupon Rate Yield to Maturity Price Quote (% of Face Value) Maturity Face Value 1 6.50% 6.30% 101 6 years $ 25,000,000 2 7.60% 6.01% 110 8 years $ 41,000,000 3 6.70% 6.42% 103 18 years $ 45,000,000...

Fresno Industries is in the 21% corporate tax bracket. Its unlevered cost of capital is 10.5%....

Fresno Industries is in the 21% corporate tax bracket. Its unlevered cost of capital is 10.5%. The company has a policy of payout all of its earnings in dividends at the end of each year. Fresno just issued $325,000 of perpetual 7 percent debt. With the proceeds, it repurchased it stock. The company expects to generate $146,000 of earnings before interest and taxes in perpetuity. a. What is the value of the company as an unlevered firm? b. Use the...

Given the following information about the company: Tax: the company’s tax rate is 35 percent. Debt:...

Given the following information about the company: Tax: the company’s tax rate is 35 percent. Debt: 9,000 of 6.5 percent coupon bonds outstanding, $1000 par value, 25 years to maturity, selling for $1,060, the bonds make semiannual payments. Common Stock: 350,000 shares outstanding, selling for $57 per share; the Beta is 1.05. Preferred stock: 15,000 shares of preferred stock outstanding, currently selling for $72 per share. The preferred stock pays an annual fixed dividend of $4. Market: 7 percent market...

Subjects