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mojhsa [17]
4 years ago
6

Desires to maintain a capital structure of 80% equity and 20% debt. They currently have an effective tax rate of 30%. The compan

y’s cost of equity capital is 12%. To obtain their debt financing, they issue bonds with an interest rate of 10%. What is the company’s weighted average cost of capital?
a. 8%
b. 10.4%
c. 11%
d. 11.6%
Business
2 answers:
Dmitry [639]4 years ago
8 0

Answer:

The correct is option C,11%

Explanation:

WACC=Ke*E/V+Kd*D/V*(1-t)

Ke is the cost of equity at 12%

E/V=Equity/Equity+Debt

Equity is 80% that is 0.8

Debt is 20%  that is 0.2

V=equity+debt=0.8+0.2=1

Kd is the cost of debt at 10%

t is the tax rate at 30% that is 0.3

WACC=12%*0.8/1+10%*0.2/1*(1-0.3)

          =12%*0.8/1+10%*0.2/1*0.7

          =12%*0.8+10%*0.2*0.7

           =12%*0.8+10%*0.14

           =9.6%+1.4%

           =11%

The weighted average cost of capital for the company is 11%

boyakko [2]4 years ago
4 0

Answer:

c. 11%

Explanation:

WACC is the average cost of capital of the firm based on the weightage of the debt and weightage of the equity multiplied to their respective costs. weightage can be calculated by using the market value of the equity and debt.

The formula for WACC is

Weighted average cost of capital = (Cost of equity x Weightage of equity) + (Cost of debt (1 - tax ) x Weightage of debt)

Weighted average cost of capital = (12% x 80%) + (10% ( 1-0.3 ) x 20% )

Weighted average cost of capital = 9.6% + 1.4% = 11%

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6 0
3 years ago
Terrace Salad issued a 25-year, annual bond with 8 percent coupon rate 15 years ago. The bond currently sells for 105 percent of
Andru [333]

Answer:

7.28%

Explanation:

Coupon rate = 8%

Nper = 10 (25-15)

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FV = 1000

PV = 1050

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3 0
3 years ago
Valentino is a patient in a nursing home for 45 days of 2017. while in the nursing home, he incurs total costs of $13,500. medic
dolphi86 [110]
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benefits that have been collected from the individuals' policy. Therefore the amount Valentino may exclude will be calculated as follows;
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Less: Amount received from Medicare                           ($8000)
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Kohl's Corporation decided to discontinue its Kohl's credit card operations. What factors would this department store company ha
mart [117]

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The most likely factor that this department store company would have considered in discontinuing its credit card operations is the issue of bad debt.

Bad debt may likely have prevented them from making the required profit to cater for the needs of the company such as payment of salaries and purchase of goods which if not treated may lead to the collapse of the company.

3 0
3 years ago
The economist Bryan Caplan recently found a pair of $10 arch supports that saved him from the pain of major foot surgery. As he
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Answer:

c. $99,990

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Therefore, Bryan enjoyed $99,990 costomer surplus from the purchase.

8 0
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