Question
In: Finance
Tapley, Inc. can raise up to $5M in new debt at a before-tax cost of 8%....
Tapley, Inc. can raise up to $5M in new debt at a before-tax cost of 8%. If more debt is required, the initial cost will be 8.5%, and if more than $10M of debt is required, the cost will be 9%.
Tapley has $6.6M in retained earnings. The firm has a flotation expense of 10% when it raises up to $2M in the external equity markets, the flotation costs are 15% above $2M to $4M in the external equity markets, and the flotation expense is 20% above $4M for new outside equity.
Tapley has determined that they may raise: $5M at a debt cost of 8%; above $5M to $10M at a debt cost of 8.5%, and; above $10M at a debt cost of 9%
Tapley has a stock price of $88/share, a current dividend of $4/share, and a growth rate of 10%. Additionally, the flotation expenses it faces in the external markets will be tiered based on the volume of stock it sells and they range from a low of 10% to a middle cost of 15% to a high cost of 20%.
BPDebt 1 =$8.33M
BPDebt 2 =$16.67M
BPNew Equity 1 =16.5M
BPNew Equity 2 =$21.5M
BPNew Equity 3 =$26.5M
After-tax Cost of Debt with a before tax cost of debt of 8%=5.6%
After-tax Cost of Debt with a before tax cost of debt of 9%=6.3%
After-tax Cost of Debt with a before tax cost of debt of 10%=7.0%
Cost of Equity for Retained Earnings =15%
Cost of Equity with a 10% flotation expense=15.56%
Cost of Equity with a 15% flotation expense =15.88%
Cost of Equity with a 20% flotation expense =16.25%
With all of the data above, please calculate (Show your Work):
WACC1 =
WACC2 =
WACC3 =
WACC4 =
WACC5 =
WACC6 =
Solutions
Expert Solution
| Weighted Average Cost of Capital =WACC | |||||||||||
| WACC=(Weight of Debt*Cost of Debt)+(Weight of Retained Earnings*Cost of Retained Earnings)+(Weight of Equity* Cost of Equity) | |||||||||||
| Md | Mr | Me | M=Md+Mr+Me | Wd=Md/M | Wr=Mr/M | We=Me/M | |||||
| ($ million) | |||||||||||
| Total Debt | Retained Earnings | Equity | Total Capital | Weight of Debt | Weight of Retained Earnings | Weight of Equity | |||||
| WACC1 | $8.33 | $6.60 | $16.50 | $31.43 | 0.26503341 | 0.2099905 | 0.5249761 | ||||
| WACC2 | $8.33 | $6.60 | $21.50 | $36.43 | 0.2286577 | 0.1811694 | 0.5901729 | ||||
| WACC3 | $8.33 | $6.60 | $26.50 | $41.43 | 0.20106203 | 0.1593049 | 0.6396331 | ||||
| WACC4 | $16.67 | $6.60 | $16.50 | $39.77 | 0.41916017 | 0.1659542 | 0.4148856 | ||||
| WACC5 | $16.67 | $6.60 | $21.50 | $44.77 | 0.37234755 | 0.1474201 | 0.4802323 | ||||
| WACC6 | $16.67 | $6.60 | $26.50 | $49.77 | 0.33494073 | 0.13261 | 0.5324493 | ||||
| Assume Tax Rate =T | |||||||||||
| 8*(1-T)=5.6 | |||||||||||
| T=(8-5.6)/8= | 0.3 | ||||||||||
| Tax Rate =0.3=30% | |||||||||||
| Aftert tax cost if before tax cost is 8.5%= | 5.95% | 8.5*(1-0.3) | |||||||||
| WACC1 | |||||||||||
| Weight | Cost | Weight*Cost | |||||||||
| Debt | 0.2650334 | 5.95% | 1.58% | ||||||||
| Retained Earnings | 0.2099905 | 15% | 3.15% | ||||||||
| Equity | 0.5249761 | 16.25% | 8.53% | ||||||||
| SUM | 13.26% | ||||||||||
| WACC1=SUM= | 13.26% | ||||||||||
| WACC2 | |||||||||||
| Weight | Cost | Weight*Cost | |||||||||
| Debt | 0.2286577 | 5.95% | 1.36% | ||||||||
| Retained Earnings | 0.1811694 | 15% | 2.72% | ||||||||
| Equity | 0.5901729 | 16.25% | 9.59% | ||||||||
| SUM | 13.67% | ||||||||||
| WACC2=SUM= | 13.67% | ||||||||||
| WACC3 | |||||||||||
| Weight | Cost | Weight*Cost | |||||||||
| Debt | 0.201062 | 5.95% | 1.20% |
 jeff jeffy answered 1 year agoRelated SolutionsTo calculate the after-tax cost of debt, multiply the before-tax cost of debt by . Perpetualcold...To calculate the after-tax cost of debt, multiply the before-tax
cost of debt by .
Perpetualcold Refrigeration Company (PRC) can borrow funds at an
interest rate of 11.10% for a period of four years. Its marginal
federal-plus-state tax rate is 25%. PRC’s after-tax cost of debt
is (rounded to two decimal places).
At the present time, Perpetualcold Refrigeration Company (PRC)
has 15-year noncallable bonds with a face value of $1,000 that are
outstanding. These bonds have a current market price...
A. The (before-tax cost of debt/after-tax cost of debt) is the interest rate that a firm...A. The (before-tax cost of debt/after-tax cost of
debt) is the interest rate that a firm pays on any new
debt financing.
B. Perpetualcold Refrigeration Company (PRC) can borrow funds at
an interest rate of 11.10% for a period of four years. Its marginal
federal-plus-state tax rate is 45%. PRC’s after-tax cost of debt is
(6.11%/7.03%/5.80%/6.72%) (rounded to two decimal
places).
C. At the present time, Perpetualcold Refrigeration Company
(PRC) has 10-year noncallable bonds with a face value of $1,000...
What is the before-tax cost of debt for Timberton's new bond issue selling for $850? The...What is the before-tax cost of debt for Timberton's new bond
issue selling for $850? The bonds mature in 20 years, pay annual
interest on face value of $1,000 and the coupon rate is 8%,
Question 28 options:
12.35%
7.83%
10.47%
9.73%
1. Do we focus on after-tax cost of debt or before-tax cost of debt? Do we...1. Do we focus on after-tax cost of debt or before-tax cost of
debt? Do we focus on new costs of debt or historical costs of debt?
Why?
2. How to adjust component cost of debt, preferred stock, common
stock for flotation costs?
3. When we calculate WACC, do we consider such current
liabilities as accounts payable, accruals, and deferred taxes as
sources of funding? Why?
Discuss factors that managers consider before they want to raise new capital be it debt or...Discuss factors that managers consider before they want to raise
new capital be it debt or euqity (500Words)
Give some advantages of equity capital over debt (400words)
Thank You
Before-tax cost of debt and? after-tax cost of debt??Personal Finance Problem???David Abbot is interested in purchasing...Before-tax cost of debt and? after-tax cost of debt??Personal
Finance Problem???David Abbot is interested in purchasing a bond
issued by Sony. He has obtained the following information on the?
security: Sony Bond Par value ? $1000 Coupon interest rate
Corporate tax rate 5.5?% 35?% Cost????????? Years to maturity 10??
?$910 Answer the following? questions: a.??Calculate the
?before-tax cost of the Sony bond using the? bond's yield to
maturity? (YTM). b.??Calculate the ?after-tax cost of the Sony bond
given the corporate...
ABC Company has a before-tax cost of debt of 5.94%. The cost of equity of an...ABC Company has a before-tax cost of debt of 5.94%. The cost of
equity of an unlevered firm (Note: cost of equity of unlevered firm
= return on assets = cost of capital of the firm's assets = RA) is
17.14%. The D/E ratio is 1.13. What is the cost of equity? Assume a
tax rate of 27.4%. Enter your answer as a percentage rounded off to
two decimal points. Do not enter % in the answer box.
if before tax cost of debt rd = 0.12, tax rate (T)=35%, what is the after...if before tax cost of debt rd = 0.12, tax rate (T)=35%, what is
the after tax cost of debt?
Innovation Co.is thinking about marketing a new software product. The initial set-up cost is$5M (and is...Innovation Co.is thinking about marketing a new software
product. The initial set-up cost is$5M (and is paid at t=0).At the
end of every year for the next 10 years (i.e., at t=1,2,...,10),
the productwill generate revenueof$1M.Afterthat,the product will be
outdated and will not be offered in the market anymore.However,the
company will have to provide customer supportin perpetuity, which
will cost $0.1M at the end of everyyear (i.e., at t=1,2,...,∞).The
cost of capital is10%and there is annual compounding frequency.
What is...
Q6. If a firm’s before-tax cost of debt is 10% and the firm has a 10%...Q6.
If a firm’s before-tax cost of debt is 10% and the firm has a
10% marginal tax rate, what is the firm’s after-tax cost of
debt?
6.5%
3.5%
9.0%
7.9%
Q7.
A company has preferred stock that can be sold for $100 per
share. The preferred stock pays an annual dividend $6. Therefore,
the cost of preferred stock is:
4.0%
5.0%
6.0%
10.0%
Q8.
Suppose your company has an equity beta of 1.5 and the current
risk-free rate is...
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
ADVERTISEMENT
|