the rio rancho corporation financed a $10 million expansion by borrowing $2 million from israel discount...

the rio rancho corporation financed a $10 million expansion by borrowing $2 million from israel discount bank at an interest rate of 4.75% per year. in addition, the company issued bonds to the public with a face value of $8 million that have both a coupon rate and yield to maturity of 6.75%. if the company's tax rate is 38%, calculate the WACC of this expansion

Expert Solution

Amount borrowed from Isareal discount bank =   $2,000,000
Before tax Cost of debt =   4.75%
After tax cost of debt = Before tax cost*(1-tax rate)
4.75%*(1-38%)
2.945%

Bonds issued for   $8,000,000
Coupon rate and both YTM is   6.75%
both are same. So Bonds value is equal to face value
After tax cost of debt = Before tax cost*(1-tax rate)
6.75%*(1-38%)
4.185%

Weight of Loan = 2000000/(2000000+8000000)=   0.2
Weight of Bonds =8000000/(2000000+8000000)=   0.8


WACC = (weight of loan* cost of debt) + (weight of bonds * cost of debt)
(0.2*2.945%)+(0.8*4.185%)
0.0394   or 3.94%

So WACC of expansion is 3.94%

(Please thumbs up)

jeff jeffy answered 2 months ago

(15) Crow Corporation is planning a $200 million expansion to be financed with debt, preferred stock,...

(15) Crow Corporation is planning a $200 million expansion to be financed with debt, preferred stock, and common stock. Their target capital structure includes 20% debt and 5% preferred stock. They will raise the rest of the funds by retained earnings. The tax rate is 25%. Bonds: Crow Corporation has bonds with 6 years to maturity and a face value of $1000. The coupon rate is 7.8% and coupons are paid semiannually. The bonds trade at $990 per bond. The...

Crook is planning a $100 million expansion to be financed with 20% debt, 5% preferred stock...

Crook is planning a $100 million expansion to be financed with 20% debt, 5% preferred stock and the rest by retained earnings. • The debt consists of 15-year bonds with a coupon rate of 12% paid annually. The face value is $1000 and the bonds are issued at par. (Assume issue costs are negligible). • The preferred stock pays an annual dividend of $3.50 a share and is sold to the public for $27 a share. Issue costs for preferred...

1. If the Apple corporation sells a bond it is a)borrowing directly from the public b)borrowing...

1. If the Apple corporation sells a bond it is a)borrowing directly from the public b)borrowing indirectly from the public c)selling shares of ownership directly to the public d)selling shares of ownership indirectly to the public 2. The single most important piece of information about a stock is its a)term b)dividend c)daily volume d)price 3. Which of the following lists is included in what economists call "money"? a)cash b)cash and stocks and bonds c)cash and stocks and bonds and real...

A project to produce rocker seats requires a $10 million investment. If the project is financed...

A project to produce rocker seats requires a $10 million investment. If the project is financed on an all equity basis, the after tax cash flows are $8 million for 10 years. The cost of unlevered equity for such a solar heater project is 12%. The firm intends to raise $5 million in debt financing that will be repaid in equal installments in 10 years. The interest rate on the debt is 8%. Is the project worthwhile? Use APV method.Tax...

For the business expansion, Atlas Corp. wants to purchase new equipment. Based on the 10% discount...

For the business expansion, Atlas Corp. wants to purchase new equipment. Based on the 10% discount rate, there are 3 options: 1. Pay 100,000 at the beginning of the first year and then pay 120,000 semiannually for 4 years. 2. Pay 500,000 at the beginning of the third year and pay 800,000 at the end of the 8th year. 3. At the beginning of the 5th year, pay 300,000 annually for 4 years. Which option should Atlas Corp choose?

Divido Corporation is an all-equity financed firm with a total market value of $100 million. The...

Divido Corporation is an all-equity financed firm with a total market value of $100 million. The company holds $10 million in cash equivalents and has $90 million in other assets. There are 1,000,000 shares of Divido common stock outstanding, each with a market price of $100. What would be the impact on Divido's stock price, market value, outstanding shares, and on the wealth of its shareholders? Of the payment of a cash dividend of $10 per share? If the company...

Suppose, an asset worth $ 1.8 million was financed using a debt ratio of 0.75, 10-year,...

Suppose, an asset worth $ 1.8 million was financed using a debt ratio of 0.75, 10-year, annually amortizing loan @10% contract rate. What is the loan amount? What is the annual loan amount? The loan will be pre-paid at the end of the 5th year, when the asset is sold. What will be the outstanding loan payment to the lender at the time of sale (including the loan balance and the fifth year's annual payment)? Consider no pre-payment penalty.

From the point of view of a borrowing corporation, what are credit and repricing risks? Explain...

From the point of view of a borrowing corporation, what are credit and repricing risks? Explain steps a company might take to minimize both.

ABC Corporation is financed entirely by equity, has 1 million shares outstanding trading at $100 per...

ABC Corporation is financed entirely by equity, has 1 million shares outstanding trading at $100 per share. Depending on the state of the economy its EBIT will be recession expected expansion 8 million 12 million 16 million XYZ Corporation has exactly the same EBIT in each economy state, but has $40 million of debt outstanding with an 8% interest rate. It also has 600,000 shares of common stock outstanding priced at $95 per share. Neither firm pays taxes. There are...

The Lopez-Portillo Company has $10.1 million in assets, 90 percent financed by debt and 10 percent...

The Lopez-Portillo Company has $10.1 million in assets, 90 percent financed by debt and 10 percent financed by common stock. The interest rate on the debt is 14 percent and the par value of the stock is $10 per share. President Lopez-Portillo is considering two financing plans for an expansion to $15.5 million in assets. Under Plan A, the debt-to-total-assets ratio will be maintained, but new debt will cost a whopping 16 percent! Under Plan B, only new common stock...

Question