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X P11-14 (similar to) Question Help Adjusted WACC. Clark Explorers, Inc., an engineering firm, has the following capital structure: Using market value and book value (separately, of course), find the adjusted WACC for Clark Explorers at the following tax rates: a. 35% b. 30% c. 20% d. 5% * Data Table Click on the loon in order to copy its content into a spreadsheet. Equity Preferred Stock Market Price $48.56 $224 24 Outstanding units 127,000 5,000 Book value $3,014,000 $1,229,000 Cost of capital 19.91% 13.59% Debt $997.16 5,459 $5,459,000 10.5% Print Dond

Answer 1

Ans a

C E F G Н K L 35% Book Value 2 E B*D A. Proportionate Tax Rate B C D 4 Particulars Cost of Capital after Tax Rate Book Value ( $) Cost of Capital Proportion of BV Corp Tax Rate WACC 5 6 Equity 5% 19.91% 15.84% 16.76% 3,014,000 0.31 7 8 Preferred Stock 1% 13.59% 10.81% 11.44% 1,229,000 0.13 9 5% 10 Debt 10.50% 8.35% 8.84% 5,459,000 0.56 11 12 Total 44.00% 35% 9,702,000 12% 1.00 13 14 35% Market Value 15 C($) E B*D 16 A Proportionate Tax Rate B 17 Particulars Cost of Capital Cost of Capital after Tax Rate Market Price Outstanding U Market Value Proportion of MV WACC Corp Tax Rate 18 19 Equity 19.91% 15.84% 16.76% 8% 48.56 127,000 6,167,120 0.48 20 21 Preferred Stock 13.59% 10.81% 11.44% 224.24 5,000 1% 1,121,200 0.09 22 23 Debt 10.50% 8.35% 8.84% 5,443,496 0.43 4% 997.16 5,459 24 25 Total 44.00% 35% 13% 1,270 12,731,816 1.00 26

Ans b

C D E G Н K M 1 30% Book Value 2 Proportionate Tax Rate B 3 E B*D A C Cost of Capital after Tax Rate Book Value ($) 4 Particulars Cost of Capital Proportion of BV WACC Corp Tax Rate 5 6 Equity 19.91% 0.31 13.58% 17.21% 5% 3,014,000 7 8 Preferred Stock 13.59% 9.27% 11.75% 0.13 1% 1,229,000 10 Debt 7.16% 9.07% 10.50% 5,459,000 5% 0.56 11 12 Total 44.00% 30% 1.00 12% 9,702,000 13 14 30% Market Value 15 C($) E B*D 16 A Proportionate Tax Rate B D 17 Particulars Cost of Capital Cost of Capital after Tax Rate Market Price Outstanding U Market Value Proportion of MV WACC Corp Tax Rate 18 19 Equity 8% 19.91% 13.58% 17.21% 127,000 48.56 6,167,120 0.48 20 21 Preferred Stock 13.59% 9.27% 11.75% 1,121,200 0.09 1% 224.24 5,000 22 23 Debt 10.50% 7.16% 9.07% 4% 997.16 5,459 5,443,496 0.43 24 25 Total 44.00% 30% 12,731,816 1.00 13% 1,270 26 27 28 29 30 Tax Rate 35% Tax Rate 5% Tax Rate 30% Tax Rate 20%

Ans c

F C D E G Н J K L M 1 20% Book Value 2 Proportionate Tax Rate B 3 E B*D A C Cost of Capital after Tax Rate Book Value ($ 4 Particulars Proportion of BVWACC Cost of Capital Corp Tax Rate 5 6 Equity 19.91% 9.05% 18.11% 6% 3,014,000 0.31 7 8 Preferred Stock 13.59% 6.18% 12.36% 2% 1,229,000 0.13 10 Debt 10.50% 4.77% 9.55% 5% 5,459,000 0.56 11 12 Total 44.00% 20% 9,702,000 1.00 13% 13 14 20% Market Value 15 C ($) Proportionate Tax Rate B E B*D 16 А D 17 Particulars Cost of Capital Cost of Capital after Tax Rate Market Price Outstanding U Market Value Proportion of MV WACC Corp Tax Rate 18 19 Equity 19.91% 9.05% 18.11% 6,167,120 9% 48.56 127,000 0.48 20 6.18% 12.36 % 21 Preferred Stock 13.59% 224,24 1% 5,000 1,121,200 0.09 22 23 Debt 10.50% 4.77% 9.55% 997.16 5,459 4% 5,443,496 0.43 24 25 Total 44,00% 20% 14% 1,270 12,731,816 1.00 26 27 28 29 30 Tax Rate 20% + Tax Rate 35% Tax Rate 30% Tax Rate 5% READY

Ans d

C D E G Н К L M 1 5% Book Value 2 E B*D A Proportionate Tax Rate B C Cost of Capital after Tax Rate Book Value ($) 4 Particulars Proportion of BVWACC Cost of Capital Corp Tax Rate 5 6 Equity 19.91% 2.26% 19.46% 6% 3,014,000 0.31 7 8 Preferred Stock 13.59% 1.54% 13.28% 1,229,000 2% 0.13 9 10 Debt 10.50% 1.19% 10.26% 5,459,000 6% 0.56 11 12 Total 44.00% 5% 14% 9,702,000 1.00 13 14 Market Value 15 5% C ($) E B*D 16 Proportionate Tax Rate B A. D 17 Particulars Cost of Capital Cost of Capital after Tax Rate Market Price Outstanding U Market Value Proportion of MV WACC Corp Tax Rate 18 19 Equity 19.91% 2,26% 19,46% 127,000 6,167,120 9% 48.56 0.48 20 21 Preferred Stock 13.59% 1.54% 13.28% 1,121,200 0.09 1% 224.24 5,000 22 23 Debt 10.50% 1.19% 10.26% 4% 997.16 5,459 5,443,496 0.43 24 25 Total 44.00% 5% 12,731,816 15% 1,270 1.00 26 27 28 29 30 Tax Rate 5% Tax Rate 35% Tax Rate 30% Tax Rate 20 %