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3 years ago

An increase in a firm's tax rate will__________ if the firm has debt capital in its capital structure:

Business

1 answer:

Temka [501]3 years ago

7 0

Answer:

d. decrease the firm's WACC.

Explanation:

As per WACC formula

WACC = ( Weight of Common Equity x Cost of Common Equity ) + ( Weight of Common Debt x Cost of Common Debt x ( 1 - Tax rate ) ) + ( Weight of Preferred Equity x Cost of Preferred Equity )

By assuming the values to prove the answer

Weights

Common equity = 55%

Preferred Equity = 15%

Debt = 30%

Costs

Common equity = 15%

Preferred Equity = 8%

Debt = 12%

Tax rate is 15%

Placing values in the formula

WACC = ( 55% x 15% ) + ( 30% x 12% x ( 1 - 15% ) ) + ( 15% x 8% )

WACC = 8.25% + 3.06% + 1.2% = 12.51%

Keeping others values constant, Now increase the Tax rate to 25% and placing vlaues in the formula

WACC = ( 55% x 15% ) + ( 30% x 12% x ( 1 - 25% ) ) + ( 15% x 8% )

WACC = 8.25% + 2.7 + 1.2% = 12.15%

Hence the WACC is decreased from 12.51% to 12.15% when the tax rate is increased from 15% to 25% keeping other values constant.

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Howard Enterprises, which has three departments, recently reported the following results: A B C Sales revenue $ 12,000 $ 48,000

almond37 [142]

Answer:

Department C should be closed

Explanation:

To determine whether or not it will be profitable to drop a loss making department, we compare the savings in fixed cost to the lost contribution from the division.

For Howard Enterprises, the department with a negative contribution should be closed otherwise its operation would reduce the overall profit by the amount of the negative contribution.

So lets work out the contribution for each department by adding back the apportioned fixed cost. See table below

A B C

$ $ $ Total

Sales Revenue 12,000 48,000 40,000 100,000

Operating cost 11,400 59,800 50,500

Operating income 600 (11,800) (10,500)

*Add back apportioned fixed cost 3,000 12,000 10,000

Contribution 3,600 200 (500)

*Apportioned fixed cost

A- 12,000/100,000× 25,000 = 3,000

B- 48,000/100000 × 25,000 = 12,000

C- 40,000/100,00×25,000 = 10,000

From the above analysis, Department C generates a negative contribution. It implies that it can barely cover its direct cost and so will deplete the total profit by its negative contribution. Hence, it should be closed

Department C should be closed

7 0

3 years ago

Jake nickells crowdsourcing approach to his business initially kept the business finances under control in all of the following

svetlana [45]

Answer:

It eliminated the need for fixed costs.

Explanation:

3 0

3 years ago

Shortage is _____.

viktelen [127]

Correct answer: "C. a situation in which quantity demanded is greater than quantity supplied"

Shortage is also referred to as excess demand - meaning that there is a greater demand than what there is to give. The opposite concept would be economic surplus.
Example: when the need for food in a certain village is greater than what is supplied or produced in that village, there a shortage of food.

3 0

3 years ago

Read 2 more answers

Employees' identification with a particular organization tends to increase:

sasho [114]

Employees' identification with a particular organization tends to increase affective commitment. Affective commitment describes how an employee feels regarding an organization. When an employee feels positive about a situation they have good positive feelings about it and therefor, tend to be more commited long term.

8 0

3 years ago

Heart & Home Properties is developing a subdivision that includes 600 home lots. The 450 lots in the Canyon section are belo

Sophie [7]

Answer:

Each Canyon lot will cost = $10,000, total costs associated to the 450 Canyon lots = $4,500,000

Each Hilltop lot will cost = $20,000, total costs associated to the 150 Hilltop lots = $3,000,000

Explanation:

When you allocate joint costs using the value basis method, the costs will be allocated to the different products using their sales value:

total costs = $4,000,000 + $3,500,000 = $7,500,000

total sales value = (450 lots x $55,000) + (150 lots x $110,000) = $24,750,000 + $16,500,000 = $41,250,000

total costs allocated per $1 of sales value = $7,500,000 / $41,250,000 = $0.181818

Each Canyon lot will cost = $0.18181818 x $55,000 = $10,000, total costs associated to the 450 Canyon lots = $4,500,000

Each Hilltop lot will cost = $0.18181818 x $110,000 = $20,000, total costs associated to the 150 Hilltop lots = $3,000,000

6 0

3 years ago