Question

Question 4 Keys Printing plans to issue a $1,000 par value, 20-year noncallable bond with a 7.00% annual coupon, paid semiannually. The company's marginal tax rate is 40.00%, but Congress is considering a change in the corporate tax rate to 57.50%. By how much would the component cost of debt used to calculate the WACC change if the new tax rate was adopted?

Group of answer choices –1.48% –1.00% –1.23% –1.29% –1.25%

Question 5 Weston Refurbishing Inc. is considering a project that has the following cash flow data. What is the project's IRR? Year 0 1 2 3 4 Cash flows -$850 $300 $290 $280 $270

Group of answer choices 13.13% 14.44% 15.89% 17.48% 19.26% 12.29% 16.02% 11.07%

Question 6 You are analyzing the cost of capital for a firm that is financed with $500 million of equity and $350 million of debt. The after-tax cost of debt capital for the firm is 9 percent, while the after-tax cost of equity capital is 15 percent . What is the overall cost of capital for the firm?

Group of answer choices 12.53% 13.78% 11.47% 16.29%

Answer 1

Answer to Question No. 4.
Cost of Debt = 7.00%

Tax Rate = 40.00%
Before-tax Cost of Debt = 7.00%
After-tax Cost of Debt = 7.00% * (1 - 0.40)
After-tax Cost of Debt = 4.20%

Tax Rate = 57.50%
Before-tax Cost of Debt = 7.00%
After-tax Cost of Debt = 7.00% * (1 - 0.5750)
After-tax Cost of Debt = 2.975%

Change in Cost of Debt due to New Tax rate adoption = 2.975% - 4.20%
Change in Cost of Debt due to New Tax rate adoption = -1.23%

Answer to Question No. 5.

Answer to Question No. 6.
Value of Equity = $500 Million
Value of Debt = $350 Million
Total Value of Firm = $500 Million + $350 Million
Total Value of Firm = $850 Million

Weight of Equity = $500 Million / $850 Million
Weight of Equity = 0.5882

Weight of Debt = $350 Million / $850 Million
Weight of Debt = 0.4118

WACC = (Weight of Equity * Cost of Equity) + (Weight of Debt * After Tax Cost of Debt)
WACC = (0.5882 * 15%) + (0.4118 * 9%)
WACC = 12.53%