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Alik [6]
3 years ago
12

The market value of Charter Cruise Company's equity is $15 million and the market value of its debt is $5 million. If the requir

ed rate of return on the equity is 20 percent and that on its debt is 8 percent, calculate the company's cost of capita
Business
2 answers:
topjm [15]3 years ago
6 0

Answer:

17%

Explanation:

To calculate this, we use the weighted average cost of capital (WACC) as follows:

Total capital = 15 + 5 = 20

Weight of equity = 15/20 = 0.75, or 75%

Weight of debt = 5/20 = 0.25, or 25%

WACC = (20% × 75%) + (8% × 25%) = 17%

Therefore, the company's cost of capital is 17%.

faust18 [17]3 years ago
3 0

Answer:

17%

Explanation:

The weighted average cost of capital (WACC) can be defined as a financial ratio that calculates an organization cost of financing and getting various assets. This is done by comparing the debt and equity structure of the business.

The formular is represented as:

WACC= E/V × Re + D/V × Rd × (1-Tc)

Where,

-E which is the market value total equity is $15million

-V which is the total market value of the company’s combined debt and equity E + D = $15 million + $5 million= $20million

- Re which is the total cost of equity is 20/100=0.2

- D which is the market value of total sent is $5million

- Rd which is the total cost of debt is =8/100 = 0.08

- Tc which is the income tax rate is 0

Therefore,

WACC= 15/20 ×0.2 +5/20 × 0.08 × (1-0)

=0.75×0.2 + 0.25×0.08×1

=0.15 + 0.02

= 0.17

= 0.17×100

= 17

Thus, the company's cost of capital is 17%

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7 0
3 years ago
Acme Company has variable costs equal to 30% of sales. The company is considering a proposal that will increase sales by $12,000
mina [271]

Answer:

$0

Explanation:

The net income is the difference between the sales and total cost which comprises of the variable cost and fixed cost. The sales and variable cost are dependent on the number of units sold.

Let

u = number of units

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but vu = 0.3su

Hence

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and total fixed costs by $8,400

New fixed cost = F + 8400

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4 0
3 years ago
What criteria do accountants use to decide whether to use present or future values in accounting statements?
Airida [17]

Answer:

Present value is nothing but how much future sum of money worth today. It is one of the important concepts in finance and it is a basis for stock pricing, bond pricing, financial modeling, banking, and insurance, etc. Present value provides us with an estimated amount to be spent today to have an investment worth a certain amount of money at a specific point in the future. Present value is also called a discounted value. It is an indicator for investors that whatever money he will receive today can earn a return in the future. With the help of present value, method investors calculate the present value of a firm’s expected cash flow to decide if a stock is worth to invest today or not.

The formula for calculating PV is shown below

PV = CF/ (1+r)n

Here ‘CF’ is future cash flow, ‘r’ is a discounted rate of return and ‘n’ is the number of periods or year.

Example

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So present-day value of Rs 10,000.00 is Rs 6805.83

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