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saul85 [17]
3 years ago
6

Rumolt Motors has 24 million shares outstanding with a price of $ 13 per share. In​ addition, Rumolt has issued bonds with a tot

al current market value of $ 368 million. Suppose​ Rumolt's equity cost of capital is 9 %​, and its debt cost of capital is 5 %. a. What is​ Rumolt's pretax weighted average cost of​ capital? b. If​ Rumolt's corporate tax rate is 21 %​, what is its​ after-tax weighted average cost of​ capital? a. What is​ Rumolt's pretax weighted average cost of​ capital? ​Rumolt's pretax weighted average cost of capital is 6.83​%. ​(Round to two decimal​ places.) b. If​ Rumolt's corporate tax rate is 21 %​, what is its​ after-tax weighted average cost of​ capital? ​Rumolt's after-tax weighted average cost of capital is 6.04​%. ​ (Round to two deci
Business
1 answer:
eduard3 years ago
3 0

Answer:

WACC without taxes         =   6.84% (rounding up to two decimals)

WACC with a tax rate of 21%=   6.27% (rounding up two decimals)

Explanation:

WACC = K_e(\frac{E}{E+D}) + K_d(1-t)(\frac{D}{E+D})

To calculate WACC we need to know the weight's for equity adn debt:

Equity: 24,000,000 x 13 = 312,000,000

Debt 368,000,000

Value: 680,000,000

Debt weight's 368M/680M = 0.458823529

Equity weight's 312M/680M =0.541176471

Now we have he weights can calculate the WACC

WACC = K_e(\frac{E}{E+D}) + K_d(1-t)(\frac{D}{E+D})

Ke 0.09

Equity weight 0.458823529

Kd 0.05

Debt Weight 0.541176471

t 0 (as this is a pretax, tax is zero)

WACC = 0.09(0.458823529411765) + 0.05(1-0)(0.541176470588235)

WACC 6.83529%

then, for b we are asked for a 21% tax rate, everything else remains unchanged:

if t = 21% then:

t 0.21

WACC = 0.09(0.458823529411765) + 0.05(1-0.21)(0.541176470588235)

WACC 6.26706%

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Answer:

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The funding required from equity is 40% of the projected capital budget of $2000,000 which is expected to be from the profit attributable to stockholders since new issue of shares is not contemplated.

In other words, dividends payable to shareholders is the net income less their counter funding of the project which is computed below:

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residual dividends=$300,000-(40%*$2000,000)

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A decrease in the elasticity of demand for the cartel's product.

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