Question

In: Finance

Assume that XYZ Corporation is a leveraged company with the following information: Kl = cost of...

Assume that XYZ Corporation is a leveraged company with the following information: Kl = cost of equity capital for XYZ = 13 percent i = before-tax borrowing cost = 8 percent t = marginal corporate income tax rate = 30 percent Calculate the debt-to-total-market-value ratio that would result in XYZ having a weighted average cost of capital of 9.3 percent and 13 percent respectively

Solutions

Expert Solution

Given:-

Cost of equity (Ke)= 13%,

Cost of Debt (Kd) (after tax) = 8 * (1-.3) = 5.6%

Solution: Calculation of Debt to total market value

Case 1: when WACC is 9.3%

NOTE: weight of equity + weight of debt =1

therefore, weight of debt = 1 - weight of equity

WACC = (Ke * weight of equity ) + [ kd after tax * (1 -weight of equity) ]

9.3 = (13 * weight of equity) + [ 5.6 * (1-weight of equity) ]

weight of equity = 0.50

weight of debt = 1- weight of equity = 1 - 0.50

weight of debt = 0.50

Thus "Debt to market value ratio" that will result in WACC of 9.3% is 0.50 times or 50%

Case 1: when WACC is 13%

NOTE: weight of equity + weight of debt =1

therefore, weight of debt = 1 - weight of equity

WACC = (Ke * weight of equity ) + [ kd after tax * (1 -weight of equity) ]

13 = (13 * weight of equity) + [ 5.6 * (1-weight of equity) ]

weight of equity = 1

weight of debt = 1- weight of equity = 1 - 1

weight of debt = 0

Thus "Debt to market value ratio" that will result in WACC of 13% is 0 times or 0%

Please upvote the answer if it was of help to you.
In case of any doubt just comment below, I would love to help.


Related Solutions

XYZ Corporation began operations on January 1, 2019. The following information is available for XYZ Corporation...
XYZ Corporation began operations on January 1, 2019. The following information is available for XYZ Corporation on December 31, 2019. Accounts receivable 1,800 Common stock 10,000 Supplies 4,000 Accounts payable 2,000 Retained earnings ? Supplies expense 200 Rental expense 9,000 Equipment 16,000 Cash 1,400 Notes payable 5,000 Insurance expense 1,000 Dividends 600 Service revenue 17,000 Instructions Prepare an (1) income statement, (2) a retained earnings statement, and (3) a balance sheet using this information.
Given the following cost information for company XYZ. Cost Item Total for the year Quality assurance...
Given the following cost information for company XYZ. Cost Item Total for the year Quality assurance $ 580,000 Equipment maintenance $ 270,000 Product redesign $ 323,000 Product warranty and repair $ 680,000 Product testing and inspection $ 385,000 Training $ 315,000 Process improvement/Kaizen $ 250,000 Material scrap $ 360,000 Rework labor $ 439,000 Incoming materials inspection $ 336,000 After sales customer support $ 215,000 Travel to suppliers/process certification $ 88,000 Travel to customers/problem solving $ 93,000 Calculate the following: a....
XYZ Company reported the following information: June July Cost A $18,000 $0.20 per unit Cost B...
XYZ Company reported the following information: June July Cost A $18,000 $0.20 per unit Cost B $19,000 $29,800 Cost C $17,000 $0.34 per unit Units sold 50,000 units 90,000 units XYZ Company expects to sell 76,000 units in August at a selling price of $1.50 per unit Calculate the amount of net income XYZ Company would expect to earn in August.
22% express an interest in seeing XYZ television show. KL Broadcasting Company ran commercials for this...
22% express an interest in seeing XYZ television show. KL Broadcasting Company ran commercials for this XYZ television show and conducted a survey afterwards. 1532 viewers who saw the commercials were sampled and 414 said that they would watch XYZ television show. What is the point estimate of the proportion of the audience that said they would watch the television show after seeing the commercials? At α=0.05, determine whether the intent to watch the television show significantly increased after seeing...
Following information for company XYZ in 2015 is given: sales $550 000, cost $332 000, depreciation...
Following information for company XYZ in 2015 is given: sales $550 000, cost $332 000, depreciation expense $120 000, interest expense 60 000, dividends 16 000, tax rate 35% percent. a) prepare income statement b) calculate company XYZ profit margin c) If company XYZ has total assets $250 000 and equity multiplier 2.5. What is return on equity (ROE) based on DuPoint identity? d) Discuss the three components of DuPoint identity
Assume the following cost data for XYZ industries, a firm that participates in a perfectly competitive...
Assume the following cost data for XYZ industries, a firm that participates in a perfectly competitive market.  Use this data to answer the following questions. Output Average Fixed Cost Average Variable Cost Average Total Cost Total Cost Marginal Cost 0 - - - 0 0 1 60 45 105 2 30 42.50 72.50 3 20 40 60 4 15 37.50 52.50 5 12 37.00 49 6 10 37.50 47.50 7 8.57 38.57 47.14 8 7.50 40.63 48.13 9 6.67 43.33 50...
Assume the following cost data for XYZ industries, a firm that participates in a perfectly competitive...
Assume the following cost data for XYZ industries, a firm that participates in a perfectly competitive market.  Use this data to answer the following questions. Output Average Fixed Cost Average Variable Cost Average Total Cost Total Cost Marginal Cost 0 - - - 1 60 45 105 2 30 42.50 72.50 3 20 40 60 4 15 37.50 52.50 5 12 37.00 49 6 10 37.50 47.50 7 8.57 38.57 47.14 8 7.50 40.63 48.13 9 6.67 43.33 50 10 6.00...
18) Assume the following information appears in the standard cost card for a company that makes...
18) Assume the following information appears in the standard cost card for a company that makes only one product: Standard Quantity or hours Standard Price or Rate Standard Cost Direct materials 5 pounds $ 11.70 per pound $ 58.50 Direct labor 2 hours $ 17.00 per hour $ 34.00 Variable manufacturing overhead 2 hours $ 3.00 per hour $ 6.00 During the most recent period, the following additional information was available: 20,000 pounds of material was purchased at a cost...
Required information [The following information applies to the questions displayed below.] XYZ is a calendar-year corporation...
Required information [The following information applies to the questions displayed below.] XYZ is a calendar-year corporation that began business on January 1, 2018. For the year, it reported the following information in its current-year audited income statement. Notes with important tax information are provided below. Use Exhibit 16-6. XYZ corp. Book Income Income statement For current year Revenue from sales $ 40,000,000 Cost of Goods Sold (27,000,000 ) Gross profit $ 13,000,000 Other income: Income from investment in corporate stock...
Assume that XYZ, Inc. Corporation, Inc. is considering a new project with the following projected cash...
Assume that XYZ, Inc. Corporation, Inc. is considering a new project with the following projected cash flows: Time zero: -150,000,000 Year 1: 110,000,000 Year 2: 85,000,000 Year 3: 90,000,000 Year 4: -40,000,000 Year 5: 150,000,000 The company has already spent $4,200,000 in research and development funds to explore the new project. If the company undertakes the new project it will also require that the company abandon an existing project that produces $12,000,000 in cash flows each year over the next...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT