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podryga [215]
3 years ago
8

Branson works for a firm that is expanding into a completely new line of business. He has been asked to determine an appropriate

WACC for an averageminusrisk project in the expansion division. Branson finds two publicly traded standminusalone firms that produce the same products as his new division. The average of the two​ firm's betas is 1.40.​ Further, he determines that the expected return on the market portfolio is​ 11.00% and the riskminusfree rate of return is​ 3.00%. Branson's firm finances​ 70% of its projects with equity and​ 30% with​ debt, and has a beforeminustax cost of debt of​ 8% and a corporate tax rate of​ 20%. What is the WACC for the new line of​ business?
Business
2 answers:
VikaD [51]3 years ago
8 0

Answer:

the WACC for the new line of​ business is 14.80%

Explanation:

Weighted Average Cost of Capital is the minimum return that a project must offer before it can be accepted.

<em>Capital Source                   Weight               Cost                  Total</em>

Equity                                     70%                18.40%              12,88%

Debt                                       30%                 6.40%               1,92%

Total                                     100%                                          14.80%

Calculation of Cost of Equity

The details available allow us to use the Capital Asset Pricing Model to find the Cost of Equity.

Cost of Equity = Risk Free Rate + Beta × Risk Premium

                       =3.00%+ 1.40×11.00%

                       = 18.40%

Calculation of Cost of Debt

We use the after tax Cost of Debt as follows :

Cost of Debt = Market Interest Rate × (1-tax rate)

                     = 8% × (1-0.20)

                    = 6.40%

Rashid [163]3 years ago
3 0

Answer:

11.86%

Explanation:

First we need to calculate the return on equity(Re).

re = rf + B(rm-rf)

re = 0.03 + (1.4)*(0.11-0.03) => 0.142 or 14.2%.

Now the formula for WACC is,

WACC = (re * %of Equity) + ((rd * %of Debt)(1-tax rate))

Hence this is calculated as,

WACC = (0.70*0.142)+((0.30*0.08(1-0.20))

WACC = 11.86% or 0.1186.

Hope this helps. Goodluck.

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Express the following comparative income statements in common-size percents. (Round your percentage answers to 1 decimal place.)
Mila [183]

Answer: Cost of Goods sold

Explanation:

Common size analysis refers to making all entries in the income statement, a percentage of sales for that year.

Current Year                                                      Prior Year

Sales                                      100%                           100%

Cost of Goods sold               75.7%                          46.5%

Gross Profit                            24.3%                          53.5%

Operating expenses             17.3%                             35%

Net Income                              7.0%                            18.5%

<em>Looking at the percentages above, one can see that the COGS increased the most from the previous year by going from 46.5% to 75.7% representing an increase of 29.2%.</em>

<em>This had the most impact on Net income as it substantially reduced Gross profit. </em>

8 0
3 years ago
Suppose Latasha comes into a large sum of money and decides to lend it out to earn interest on it. She realizes, however, that e
qwelly [4]

Answer:

moral hazard

Explanation:

Banks reduce the risk of moral hazard when they monitor and supervise how their clients are using the loans and credits made to them.

Some types of credits do not require any type of monitoring or control, e.g. a credit card which a client can use basically however he/she wants to. But other types of credit that are taken for purchasing assets, e.g. a mortgage, must be used by the bank's client to specifically carryout the intended activity.

In economics, moral hazard refers to the tendency that an economic party can engage in unusually risky activities because the capital (money) that they are investing is not theirs and the negative effects of a potential loss will be suffered most by other parties.

5 0
3 years ago
All Wet Water Softener Systems has Cash of $400?, Accounts Receivable of $1,000?, and Office Supplies of $600. All Wet owes $300
DanielleElmas [232]

Answer:

D. 5.00

Explanation:

The calculation of current ratio is given below :-

Current Ratio = Current Assets ÷ Current Liabilities

where,

Current Asset = cash + account receivable + office supply

= $400 + $1000 + $600

= $2,000

and the Current Liabilities is

= Account payable + salary payable

= $300 + $100

= $400

So, the current ratio is

= $2,000 ÷ $400

= 5 times

7 0
3 years ago
A(n) ____________________ is a contractual provision that says a seller of a business will not engage in a similar business with
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Answer: licensing clause

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2 years ago
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victus00 [196]

Answer:

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the Adjustment include

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Explanation:

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Unrealized profit ( $50,000 - $30,000)                       20,000

Depreciation on Unrealized profit( 20,000/5)              <u>  (4,000</u>)

Net unrealized profit                                                      <u>   16,000</u>

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