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melomori [17]
3 years ago
5

Lawler's is considering a new project. The company has a debt-equity ratio of .64. The company's cost of equity is 14.9 percent,

and the aftertax cost of debt is 5.3 percent. The firm feels that the project is riskier than the company as a whole and that it should use an adjustment factor of +1.8 percent. What is the project cost of capital if the tax rate is 34 percent?
Business
1 answer:
blondinia [14]3 years ago
5 0

Answer:

Project's WACC = 12.95%

Explanation:

The WACC or weighted average cost of capital is the cost of a firm's capital structure. The capital structure of a firm may contain one or all of the following components - debt, preferred stock, common stock. For a firm with two components in capital structure in form of debt and equity, the WACC is calculated as follows,

WACC = wD * rD * (1+tax rate)  +  wE* rE

Where,

  • wD and wE are the weights of debt and equity in the total capital structure
  • rD and rE are the cost of each component
  • We multiply the cost of debt by 1 - tax rate to calculate the after tax cost of debt

We must first determine the weight of debt and equity in total capital structure.

A debt to equity ratio of 0.64 means 0.64 debt for every 1 dollar of equity. The total assets are made up of debt + equity. So, total assets are 0.64 + 1 = 1.64

Weight of debt = 0.64 / 1.64 = 16/41

Weight of equity = 1 / 1.64 = 25/41

WACC = 16/41 * 0.053  +  25/41 * 0.149

WACC = 0.1115 or 11.15%

The projects cost of capital is 1.8% more than the company's WACC.

So, the project's cost of capital is,

Project's WACC = 11.15% + 1.8%

Project's WACC = 12.95%

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What are the three elements of business equipment and resource?​
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2 years ago
Which of the following could result in the termination and liquidation of a partnership?1) Partners are incompatible and choose
Natalka [10]

Answer:

E) 1, 2, and 3

Explanation:

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Frank purchased land containing oil reserves for $425,000. He has calculated his cost depletion for the year to be $20 per barre
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Answer:

1 of 3.  $52,000

2 of 3. $68,000

3 of 3 Percentage depletion

Explanation:

The percentage depletion rate = 15% of gross income and limited to 65% of the net income

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The operating expense = $520,000

The net income = $600,000 - $520,000 = $80,000

Therefore at 15% gross income, we have;

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65% of the net income gives;

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1 of 3. Therefore since 15% of the gross income ($90,000) > 65% of the net income($52,000), we have

The percentage depletion rate = $52,000

2 of 3. Therefore, he can deduct $120,000 - $52,000  = $68,000

3 of 3 He should therefore use the percentage depletion method to maximize his deductions

We therefore have;

Assuming this is domestic production, the amount of percentage depletion expense is _$52,000_. If he uses this method he can deduct _$68,000_ for tax purposes. He should use the _percentage depletion_ method to maximize his deductions.

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