Question

In: Finance

Ebling Inc. finances with 0.2 fraction debt, 0.2 fraction preferred and the remaining common stock. Ebeling's...

Ebling Inc. finances with 0.2 fraction debt, 0.2 fraction preferred and the remaining common stock. Ebeling's before tax cost of debt is 0.07, it cost of preferred stock is 0.13, and its cost of common stock is 0.20. If Ebeling is subject to a 0.2 fraction corporate income tax, what is the company's Weighted Average Cost of Capital?

Solutions

Expert Solution

The weighted average cost of capital is calculated using the below formula:

WACC=Wd*Kd(1-t)+Wps*Kps+We*Ke

where:

Wd= Percentage of debt in the capital structure.

Kd= The before tax cost of debt

Wps= Percentage of preferred stock in the capital structure

Kps=Cost of preferred stock

We=Percentage of equity in the capital structure

Ke= The cost of common equity.

T= Tax rate

WACC= 0.20*7%*(1 – 0.20) + 0.20*13% + 0.60*20%

            = 0.20*5.60% + 0.20*13% + 0.60*20%

            = 1.120% + 2.60% + 12%

            = 15.72%.

In case of any query, kindly comment on the solution.

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

Ebling Inc finances with 0.2 fraction debt, 0.1 fraction preferred and the remaining common stock. If...
Ebling Inc finances with 0.2 fraction debt, 0.1 fraction preferred and the remaining common stock. If Ebeling is subject to a 0.3 fraction corporate income tax, what is the company's Weighted Average Cost of Capital.
Ebling Inc. finances with 0.2 fraction debt, 0.1 fraction preferred and the remaining common stock. Ebeling's...
Ebling Inc. finances with 0.2 fraction debt, 0.1 fraction preferred and the remaining common stock. Ebeling's before-tax cost of debt is 0.05, it cost of preferred stock is 0.12, and its cost of common stock is 0.16. If Ebeling is subject to a 0.3 fraction corporate income tax, what is the company's Weighted Average Cost of Capital?
Broward's tax rate is 25%. Broward finances with only debt and common equity, so it has no preferred stock
Broward Manufacturing recently reported the following information:Net income$435,000ROA10%Interest expense$134,850Accounts payable and accruals$1,050,000Broward's tax rate is 25%. Broward finances with only debt and common equity, so it has no preferred stock. 40% of its total invested capital is debt, and 60% of its total invested capital is common equity. Calculate its basic earning power (BEP), its return on equity (ROE), and its return on invested capital (ROIC). Do not round intermediate calculations. Round your answers to two decimal places.BEP:   %ROE:   %ROIC:   %
​AllCity, Inc., is financed 40 % with​ debt, 13% with preferred​ stock, and 47% with common...
​AllCity, Inc., is financed 40 % with​ debt, 13% with preferred​ stock, and 47% with common stock. Its cost of debt is 6.3 %, its preferred stock pays an annual dividend of $2.51 and is priced at $ 25. It has an equity beta of 1.14. Assume the​ risk-free rate is 2.2%​, the market risk premium is 6.9 % and​ AllCity's tax rate is 35%. What is its​ after-tax WACC? ​Note: Assume that the firm will always be able to...
The identification of the proportions of debt, retained earnings, preferred stock, and common stock used to...
The identification of the proportions of debt, retained earnings, preferred stock, and common stock used to finance a firm’s operations and capital investments is referred to as the: A. Capital structure decision B. Financing decision C. Financial risk decision D. Capital budgeting decision New projects should be funded using: A. The same proportions of debt and equity that finance a firm’s total assets B. The source of funds (debt or equity) with the lowest cost of capital C. Debt only...
The firm’s target capital structure is 60% common stock, 30% debt, and 10% preferred stock. Debt:...
The firm’s target capital structure is 60% common stock, 30% debt, and 10% preferred stock. Debt: 7,000 5.0% coupon bonds outstanding, with 11 years to maturity, $1,000 par value and a quoted price of 106.25% of par value. These bonds pay interest semiannually. Common Stock: 300,000 shares of common stock selling for $65.40 per share. The stock has a beta of 1.44. Preferred Stock: 8,500 shares of preferred stock selling at $96.00 per share and pay annual dividends of $5.70....
How does preferred stock differ from both common equity and debt? Is preferred stock more risky...
How does preferred stock differ from both common equity and debt? Is preferred stock more risky than common stock? What is floating rate preferred stock? Need answer not in Chegg Database and source.
(WACC) A company has common stock, preferred shares, and debt outstanding. As of today, the common...
(WACC) A company has common stock, preferred shares, and debt outstanding. As of today, the common stock is valued at $10 per share, with 2 million shares outstanding. It has a beta of 5, and market return is estimated to be 4% while treasury bills offer 1.5% risk-free rate. The preferred stock is valued at $15 per share, which pays dividend of $2 each year at a constant growth rate of 3%. Preferred stocks have 5 million shares outstanding. Finally,...
(WACC) A company has common stock, preferred shares, and debt outstanding. As of today, the common...
(WACC) A company has common stock, preferred shares, and debt outstanding. As of today, the common stock is valued at $10 per share, with 2 million shares outstanding. It has a beta of 5, and market return is estimated to be 4% while treasury bills offer 1.5% risk-free rate. The preferred stock is valued at $15 per share, which pays dividend of $2 each year at a constant growth rate of 3%. Preferred stocks have 5 million shares outstanding. Finally,...
The WACC is a weighted average of the costs of debt, preferred stock, and common equity....
The WACC is a weighted average of the costs of debt, preferred stock, and common equity. Would the WACC be different if the equity for the coming year came solely in the form of retained earnings versus some equity from the sale of new common stock? Would the calculated WACC depend in any way on the size of the capital budget? How might dividend policy affect the WACC?
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT