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Amanda [17]
3 years ago
12

Anderson's Furniture Outlet has an unlevered cost of capital of 8%, a tax rate of 35%, and expected earnings before interest and

taxes of $1,500. The company has $3,500 in bonds outstanding that have a 5% coupon and pay interest annually. The bonds are selling at par value. What is the cost of equity?
Business
1 answer:
navik [9.2K]3 years ago
5 0

Answer:

8.67%

Explanation:

The computation of cost of equity is shown below:-

Before capitalization the value of equity = Interest and taxes × (1 - tax rate) ÷ Cost of capital

= $1,500 × (1 - 0.35) ÷ 0.08

= $1,500 × 0.65 ÷ 0.08

= $12,188

Value of firm with debt = The value of equity before capitalization + (Bonds outstanding × tax rate)

= $12,188 + ($3,500 × 0.35)

= $13,413

After recapitalization debt equity ratio = Cost of capital + ((Cost of capital - Coupon percentage) × Tax rate × (1 - tax rate)

= 0.08 + ((0.08 - 0.05) × (0.35) × (0.65))

= 0.08 + ((0.03) × (0.35) × (0.65))

= 8.67%

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a. What is the extended list price of the order?

This will be gotten by multiplying the number of cases with the price list. From the question, we are told that Whole Foods Market ordered 12 cases of organic vegetable soup with a list price of $18.90 per case and 8 cases of organic baked beans with a list price of $33.50 per case.

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