Question

In: Finance

Problem 12-10 Taxes and WACC [LO 3] Benjamin Manufacturing has a target debt-equity ratio of .45....

Problem 12-10 Taxes and WACC [LO 3]

Benjamin Manufacturing has a target debt-equity ratio of .45. Its cost of equity is 12 percent, and its cost of debt is 7 percent.

Required:

If the tax rate is 35 percent, what is the company’s WACC? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

  WACC

%

Hints

References

eBook & Resources

Hint #1

Solutions

Expert Solution

WACC 9.69%
Working:
a. After tax cost of debt = Before tax cost of debt*(1-Tax Rate)
= 7%*(1-0.35)
= 4.55%
b. Debt-Equity ratio = 0.45
Debt           0.45
Equity           1.00
Total           1.45
weight of:
Debt           0.45 /           1.45 =           0.31
Equity           1.00 /           1.45 =           0.69
b. Calculation of WACC:
Capital Component Weight Cost Weighted Average cost
Debt           0.31 4.55% 1.41%
Equity           0.69 12.00% 8.28%
Total 9.69%

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

Problem 12-10 Taxes and WACC [LO 3] Benjamin Manufacturing has a target debt-equity ratio of .45....
Problem 12-10 Taxes and WACC [LO 3] Benjamin Manufacturing has a target debt-equity ratio of .45. Its cost of equity is 12 percent, and its cost of debt is 7 percent. Required: If the tax rate is 35 percent, what is the company’s WACC? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)   WACC % Hints References eBook & Resources Hint #1
The company currently has a target debt–equity ratio of .45, but the industry target debt–equity ratio...
The company currently has a target debt–equity ratio of .45, but the industry target debt–equity ratio is .40. The industry average beta is 1.20. The market risk premium is 8 percent, and the risk-free rate is 6 percent. Assume all companies in this industry can issue debt at the risk-free rate. The corporate tax rate is 40 percent. The project requires an initial outlay of $680,000 and is expected to result in a $100,000 cash inflow at the end of...
A company's CFO wants to maintain a target debt-to-equity ratio of 1/3. If the WACC is...
A company's CFO wants to maintain a target debt-to-equity ratio of 1/3. If the WACC is 18.6%, and the pretax cost of debt is 9.4%, what is the cost of common equity assuming a tax rate of 33%? 16.40% 20.90% 21.70% 23.93%
Garnet, Inc., has a target debt-equity ratio of 0.39. Its WACC is 11.7 %, and the...
Garnet, Inc., has a target debt-equity ratio of 0.39. Its WACC is 11.7 %, and the tax rate is 31 % If you know that the after-tax cost of debt is 5.8%, what is the cost of equity? (Report answer in percentage terms and round to 2 decimal places. Do not round intermediate calculations).
Garnet, Inc., has a target debt-equity ratio of 0.59. Its WACC is 11.4 %, and the...
Garnet, Inc., has a target debt-equity ratio of 0.59. Its WACC is 11.4 %, and the tax rate is 36 % If you know that the after-tax cost of debt is 6.5%, what is the cost of equity? (Report answer in percentage terms and round to 2 decimal places. Do not round intermediate calculations).
Cunningham Inc. has a target debt-equity ratio of .41, its WACC is 9.6 percent, and the...
Cunningham Inc. has a target debt-equity ratio of .41, its WACC is 9.6 percent, and the tax rate is 22 percent. a. If the company's cost of equity is 12 percent, what is its pretax cost of debt? b. If instead, you know that the aftertax cost of debt is 6.1 percent, what is the cost of equity?
Welling Inc. has a target debt–equity ratio of 0.78. Its WACC is 9.5%, and the tax...
Welling Inc. has a target debt–equity ratio of 0.78. Its WACC is 9.5%, and the tax rate is 35%. a. If the company’s cost of equity is 14%, what is its pre-tax cost of debt? (Do not round intermediate calculations. Round the final answer to 2 decimal places.) Cost of debt            % b. If instead you know that the after-tax cost of debt is 6.8%, what is the cost of equity? (Do not round intermediate calculations. Round the...
Clifford, Inc., has a target debt-equity ratio of 1.20. Its WACC is 8.7 percent, and the...
Clifford, Inc., has a target debt-equity ratio of 1.20. Its WACC is 8.7 percent, and the tax rate is 25 percent. a. If the company’s cost of equity is 13 percent, what is its pretax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. If instead you know that the aftertax cost of debt is 5.8 percent, what is the cost of equity? (Do not round...
Starset, Inc., has a target debt-equity ratio of 0.89. Its WACC is 10.5 percent, and the...
Starset, Inc., has a target debt-equity ratio of 0.89. Its WACC is 10.5 percent, and the tax rate is 33 percent.       If the company's cost of equity is 14 percent, what is the pretax cost of debt? If instead you know that the aftertax cost of debt is 5.6 percent, what is the cost of equity?
Starset, Inc., has a target debt-equity ratio of 0.71. Its WACC is 11.5 percent, and the...
Starset, Inc., has a target debt-equity ratio of 0.71. Its WACC is 11.5 percent, and the tax rate is 34 percent. If the company's cost of equity is 16.5 percent, what is the pretax cost of debt? If instead you know that the aftertax cost of debt is 5.9 percent, what is the cost of equity?
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT