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Kitty [74]
3 years ago
12

Barton Industries expects that its target capital structure for raising funds in the future for its capital budget will consist

of 40% debt, 5% preferred stock, and 55% common equity. Note that the firm's marginal tax rate is 40%. Assume that the firm's cost of debt, rd, is 6.9%, the firm's cost of preferred stock, rp, is 6.4% and the firm's cost of equity is 10.9% for old equity, rs, and 11.51% for new equity, re. What is the firm's weighted average cost of capital (WACC1) if it uses retained earnings as its source of common equity? Round your answer to 3 decimal places. Do not round intermediate calculations. 68.97 % What is the firm’s weighted average cost of capital (WACC2) if it has to issue new common stock? Round your answer to 3 decimal places. Do not round intermediate calculations.
Business
1 answer:
iris [78.8K]3 years ago
4 0

Answer:

a. With New Stock = 8.307%

b. With Old stock = 7.971%

Explanation:

The weighted average cost of capital (WACC) defines the cost rate that blends the capital structure cost including equity, debt, and preferred stock.

Requirement A

If it uses retained earnings as its source of common equity,

Given,

The weight of the combination of the capital structure is -

W_{d} = 40% = 0.40; W_{p} = 5% = 0.05; W_{e} = 55% = 0.55

For cost of debt, we have to find cost of debt after tax, R_{d}(1 - t) =

6.9% x (1 - 0.40) = 4.14%

Cost of preferred stock, R_{p} = 6.4%

Cost of new Equity, R_{e} = 11.51%

We know, the weighted average cost of capital (WACC) =

W_{d} x R_{d} + W_{p} x R_{p} + W_{e} x R_{e}

= (0.40 x 4.14%) + (0.05 x 6.4%) + (0.55 x 11.51%)

= 1.656% + 0.32% + 6.3305%

= 8.307%

Requirement B

If it has to issue new common stock, the weighted average cost of capital (WACC) = W_{d} x R_{d} + W_{p} x R_{p} + W_{s} x R_{s}

Given,

The weight of the combination of the capital structure is -

W_{d} = 40% = 0.40; W_{p} = 5% = 0.05; W_{e} = 55% = 0.55

For cost of debt, we have to find cost of debt after tax, R_{d}(1 - t) =

6.9% x (1 - 0.40) = 4.14%

Cost of preferred stock, R_{p} = 6.4%

Cost of new Equity, R_{s} = 10.9%

Therefore, putting the value in the equation,

WACC = (0.40 x 4.14%) + (0.05 x 6.4%) + (0.55 x 10.9%)

WACC = 1.656% + 0.32% + 5.995%

WACC = 7.971%

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8 0
3 years ago
PackMan Corporation has semiannual bonds outstanding with nine years to maturity and the bonds are currently priced at $754.08.
EleoNora [17]

Answer:

8.23%

Explanation:

Since this bond pays semi-annual coupons, it means that the payments occur every 6 months; making it 2 periods per year. Using a Financial calculator; enter the following inputs. If using TI BA II plus, key in the number first, then the function.

Total duration; N = 9*2 = 18

Face Value ; FV = 1,000 (use 1,000 if the value is not given)

Present value or price ; PV = -754.08

Semiannual Coupon Payment; PMT = Semiannual coupon rate *Face value

Semiannual Coupon Payment; PMT = (7.25%/2) *1000 = 36.25

The Yield to maturity;YTM is the <em>annual</em> pretax I/Y which is the Pretax cost of debt in this case

therefore, CPT I/Y = 5.875% (note: semi-annual rate)

Next, convert the semiannual rate to annual rate i.e the YTM;

= 5.875%*2

Pretax cost of debt (YTM) = 11.75%

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8 0
3 years ago
West Corp. leased a building and received the $36,000 annual rental payment on June 15, 2004.
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Answer:

$7,200

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West should recognize 6 months of rent during 2004 = $36,000 x 6/12 = $18,000

So West will recognize the remaining $18,000 in rent during 2005, but it decided that the operation will be taxed completely during 2004.

Since the future taxable income will be less than the future pre-tax accounting income be $18,000, then they must report a deferred tax asset = $18,000 x 40% = $7,200

The current tax rate is lower than the future tax rate, but West has to record its tax asset based on the future tax rate, not the current one.

3 0
3 years ago
Suppose that three firms make up the entire tire manufacturing industry. One has a 40% market share, and the other two have a 30
masha68 [24]

Answer:

3400

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Explanation:

the Herfindahl index is used to calculate the concentration of firms in an industry

The HHI is calculated by squaring the market share of each firm in the industry.

40² + 30² + 30² = 3400

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