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Sergio039 [100]
4 years ago
6

​AllCity, Inc., is financed 39 % with​ debt, 11 % with preferred​ stock, and 50 % with common stock. Its cost of debt is 6.1 %​,

its preferred stock pays an annual dividend of $ 2.53 and is priced at $ 33. It has an equity beta of 1.11. Assume the​ risk-free rate is 2.2 %​, the market risk premium is 6.7 % and​ AllCity's tax rate is 35 %. What is its​ after-tax WACC?
Business
1 answer:
elena-14-01-66 [18.8K]4 years ago
4 0

Answer:

Cost of debt (Kd) = 6.1%

Cost of preferred stock = <u>Dividend paid</u>

                                        Current market price

                                      = $2.53

                                         $33

                                      = 0.0767 = 7.67%

Risk-free rate (Rf) = 2.2%

Beta (β) = 1.11

Market risk premium (Rm - Rf) = 6.7%

Cost of equity (Ke) = Rf +β(Rm - Rf)

Cost of equity (Ke) = 2.2 + 1.11(6.7)

Cost of equity (Ke) =  9.637%    

WACC = Kd(D/V)(1-T) + Kp(P/V) + Ke(E/v)

WACC = 6.1(39  /100)(1 -0.35) + 7.67(11/100) + 9.637(50/100)  

WACC  = 1.55 + 0.84 + 4.82  

WACC  = 7.21%                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

Explanation:

In this case, cost of debt has been given. Cost of preferred stock is calculated as current dividend paid divided by current market price.

Cost of equity is calculated based on capital asset pricing model, which is Risk-free rate plus beta multiplied by the market risk premium.

WACC equals after-tax cost of debt multiplied by the proportion of debt in the capital structure plus cost of preferred stock multiplied by the proportion of preferred stock in the capital structure plus cost of equity multiplied by proportion of equity in the capital structure.

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2 years ago
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3 years ago
Show all your steps and reasoning.
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The following are the solution to the given question:

Explanation:

In option a:

The Mandovi's absolute benefit in this issue is that so many ratios are produced and transform because less power is spent than Ducennia (50 -100 compounds to 150 -200).

In option b:

\left\begin{array}{ccc} \text{ O.C}&\text{Per.Ratid}&\text{Per Tauron} \\\text{Mandovia}&\text{0.5\ Tauron}&2 \ Rotid\\\text{Ducennia}&\text{ 0.75\ Tauron}& 1.33 \ Rotid \end{array}\right

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There are a total of 1 billion labours are available for the equally divided for 0.5 billion and 0.5 billion  for both and the Rotiods is\frac{0.5}{50} = 0.01 \ \ billion

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