WACC k bell jewlers wishes to explore the effect on its cost of
capital of the...
WACC k bell jewlers wishes to explore the effect on its cost of
capital of the rate at which the company psys taxe
s.
the firm whishes to maintain a capital structure of 40% debt, 10%
preferred stock and 50% common stock . the cost of financing with
retained earnings is 10% the cost of preferred stock financing is
8% and the before tax cost of debt financing is 6% . Calculate the
weighted average cost of capital WACC given the tax rate assumption
in parts a to c
tax
rate =40%
tax
rate =35%
tax
rate =25%
Solutions
Expert Solution
AS TAX RATE DECREASES, THE WACC INCREASES. THE BASIC
REASON IS THAT HIGHER THE TAX RATE, COMPANY WILL HAVE HIGHER TAX
ADVANTAGE DUE TO DEBT.
The effect of tax rate on WACC K. Bell Jewelers wishes to
explore the effect on its cost of capital of the rate at which the
company pays taxes. The firm wishes to maintain a capital structure
of35%debt,15%preferred stock, and50%common stock. The cost of financing with retained earnings
is16%,the cost of preferred stock financing is12%,and the before-tax cost of debt financing is7%.Calculate the weighted average cost of capital(WACC)given a tax rate of 30%.The firm's WACC isnothing%.(Round to two decimal places.)
Concept of cost of capital and WACC Mace Manufacturing is in the
process of analyzing its investment decision-making procedures. Two
projects evaluated by the firm recently involved building new
facilities in different regions, North and South. The basic
variables surrounding each project analysis and the resulting
decision actions are summarized in the following table.
Basic variables
North
South
Initial cost
−$6 million
−$5 million
Life
15 years
15 years
Expected return
8%
15%
Least-cost financing
Source
Debt
Equity
Cost (after-tax)...
Charlotte's Crochet Shoppe has 14,300 shares of common stock outstanding at a price per share of $75 and a rate of return of 11.61%. The company also has 280 bonds outstanding, with a par value of $2000 per bond. The pre-tax cost of debt is 6.13% and the bonds sell for 97.2% of the par.
What is the weighted average cost of capital (WACC), if the tax rate is 40%?
Discuss the difference of Firm’s Weighted Average Cost of
Capital (WACC), Divisional WACC, Project Specific WACC
between “Cash provided by operations” and “Free Cash Flows.”
Your division is considering two projects. Its WACC is 10%
(weighted average cost of capital, that represent a firm’s cost of
capital in which each category of capital is proportionately
weighted), the projects’ after-tax cash flows (in millions of
dollars) would be as follows:
Project A
0 = - $30
1 = - $ 5
2 = $ 10
3 = $ 15
4 = 20
Project B
0 = - $ 30
1 = $ 20
2 = $10...
Prashant Ceramics Limited, is interested in estimating its
weighted average cost of capital (WACC) now that it is in its rapid
growth stage. Prashant Ceramics has 100,000 $1,000 par, 13 percent
semi-annual coupon bonds outstanding. It also has 1 Million shares
of 6% preferred stock outstanding with $100 face value. The
preferred stock sells for $80 per share. The common stock sells for
$70 per share and has a beta of 1.8. It has 1.5 million shares of
common stock...
Prashant Ceramics Limited, is interested in estimating its
weighted average cost of capital (WACC) now that it is in its rapid
growth stage. Prashant Ceramics has 100,000 $1,000 par, 13 percent
semi-annual coupon bonds outstanding. It also has 1 Million shares
of 6% preferred stock outstanding with $100 face value. The
preferred stock sells for $80 per share. The common stock sells for
$70 per share and has a beta of 1.8. It has 1.5 million shares of
common stock...
Why would a firm not use its weighted average cost of capital
(WACC) to evaluate all proposed investments? (5m)
Hints and notes to students: dot points are acceptable.
It is important to explain your answers with details or demonstrate
your understanding by applying examples. Full marks will
not be awarded to identical (100% similarity)
answers from the required textbook.
Why would a firm not use its weighted average cost of capital
(WACC) to evaluate all proposed investments? Please give examples
as well
Under what circumstances will the IRR and NPV rules lead to the
same decision (accept/reject)? When might they conflict? Please
give examples as well
1. ( A ) What is the WACC (weighted
cost of capital) for a company if it borrows from two sources: bank
loan of 25 million at 6% per compounded monthly, and retained
earning of 10 million with earnings per share of 35 cents and price
per share 14.00 dollars. Income tax rate is 35%.
( B )When using the “longest life”
planning horizon what issue (or issues) might you have to consider
for alternatives whose cash flow profiles are...