Question

In: Finance

A firm uses INR 50 million of debt, INR 15 million of short-term debt, and INR...

A firm uses INR 50 million of debt, INR 15 million of short-term debt, and INR 90 million of common equity to finance its assets. If the before-tax cost of debt is 10%, after-tax cost of short-term debt is 8%, and the cost of common equity is 16%, calculate the weighted average cost of capital for the firm assuming a tax rate of 20%.

Solutions

Expert Solution

Market Value of Debt = 50 Million

Market Value of Short-term Debt = 15 Million

Market Value of Equity = 90 Million

Total Market Value = 155 Million

Weight of Debt = 0.3226 [50 Million / 155 Million]

Weight of Short-term Debt = 0.0968 [15 Million / 155 Million]

Weight of Common Equity = 0.5806 [90 Million / 155 Million]

After-tax cost of debt

After-tax cost of debt = Yield to Maturity on Debt x (1 – Tax rate)

= 10.00% x (1 – 0.20)

= 10.00% x 0.80

= 8.00%

After-tax cost of Short-term debt = 8.00%

Cost of Common Equity = 16.00%

Weighted Average Cost of Capital (WACC)

Weighted Average Cost of Capital (WACC) = [After-tax cost debt x Weight of Debt] + [After-tax cost of short-term debt x Weight of short-term Debt] + [Cost of Equity x Weight of Equity]

= [8.00% x 0.3226] + [8.00% x 0.0968] + [16.00% x 0.5806]

= 2.58% + 0.77% + 9.29%

= 12.65%

Hence, the Weighted Average Cost of Capital (WACC) will be 12.65%


Related Solutions

A firm uses INR 50million of debt,INR15million of short-termdebt, and INR 90million of common equity...
A firm uses INR 50million of debt,INR15million of short-term debt, and INR 90million of common equity to finance its assets. If the before-tax cost of debt is 10%, after-tax cost of short-term debt is 8%, and the cost of common equity is 16%, calculate the weighted average cost of capital for the firm assuming a tax rate of 20%.
A firm with no debt financing has a firm value of $50 million. It has a...
A firm with no debt financing has a firm value of $50 million. It has a corporate marginal tax rate of 35 percent. The firm’s investors are estimated to have marginal tax rates of 22 percent on interest income and a weighted average of 17 percent on stock income. The firm is planning to change its capital structure by issuing $10 million in debt, and repurchasing $10 million of common stock. Based on the information above, answer next 2 questions....
The EBIT of a firm is INR 15 crores. The firm is currently allequity financed...
The EBIT of a firm is INR 15 crores. The firm is currently all equity financed at a cost of equity capital of 15%.The firm intends to lever up and change its capital structure by taking on debt of INR 50 crores in perpetuity as it provides some value add to the firm.If the prevailing tax rate is 20%, what is the value of this firm before and after the change in capital structure?The firm is currently efficiently run and...
The EBIT of a firm is INR 15 crores. The firm is currently allequity financed...
The EBIT of a firm is INR 15 crores. The firm is currently all equity financed at a cost of equity capital of 15%. The firm intends to lever up and change its capital structure by takingondebtofINR50croresinperpetuityasitprovides some value add to the firm. If the prevailing tax rate is 20%, what is the value of this firm before and after the change in capital structure? The firm is currently efficiently run and the shareholders are happy with the current earnings...
A firm has a total debt of 10 million, and equity of 15 million. The company...
A firm has a total debt of 10 million, and equity of 15 million. The company pays 8% interest on the debt and return on equity is 14%. If the tax rate of the company is 35%, calculate the cost of capital for the company?
I. Cost of Debt Type of Debt Amount ($million) Weight Interest rate (%) Short-term debt US$...
I. Cost of Debt Type of Debt Amount ($million) Weight Interest rate (%) Short-term debt US$ 13,600 11.27% Existing long-term debt US$ 5,262 9.75% Sub. Increasing-rate notes (Class I) US$ 1,250 13.00% Sub. Increasing-rate notes (Class II) US$ 3,750 14.00% Senior convertible debentures US$ 1,800 14.50% Partnership debt securities US$ 500 11.20% Total US$ 26,162 After-tax cost of debt (tax rate @35.5%)
(a) Kim Corp. has $50 million in excess cash and no debt. The firm expects to...
(a) Kim Corp. has $50 million in excess cash and no debt. The firm expects to generate additional free cash flows of $40 million per year in subsequent years and will pay out these future free cash flows as regular dividends. Kim Corp.’s cost of capital is 10% and there are 10 million shares outstanding. Kim Corp.'s board decided to use the entire $50 million to repurchase shares. Assume that you own 2,500 shares of Kim Corp. stock and that...
Corporation A has $50 million in excess cash and no debt. The firm expects to generate...
Corporation A has $50 million in excess cash and no debt. The firm expects to generate additional free cash flows of $40 million per year in subsequent years and will pay out these future free cash flows as regular dividends.  Corporation A's cost of capital is 10% and there are 10 million shares outstanding.  Corporation A's board decided to use the entire $50 million to repurchase shares. Assume that you own 2,500 shares of Corporation A stock and that Corporation A uses...
Micro Bike Company has short term investments of $50, debt of $1,500, and preferred stock of...
Micro Bike Company has short term investments of $50, debt of $1,500, and preferred stock of $200. The equity of the Micro Bike has 100 shares. The company forecasts the following: 2015 2016 2017 2018 Free Cash Flow $30 $90 $130 $210 $220 Target WACC 10% 10% 10% 10% 10% Free Cash Flow Growth 15% 200% 44.4% 61.5% 4.8% a. What is the Present Value of Free Cash Flows? b.What is the Present Value of the Horizon Value? c. What...
Blunderbluss Manufacturing's balance sheets report $305 million in total debt, $64 million in short-term investments, and...
Blunderbluss Manufacturing's balance sheets report $305 million in total debt, $64 million in short-term investments, and $65 million in preferred stock. Blunderbluss has 5 million shares of common stock outstanding. A financial analyst estimated that Blunderbuss's value of operations is $850 million. What is the analyst's estimate of the intrinsic stock price per share? Round your answer to the nearest cent.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT