The total value of a Guess Co. is $3,000,000 and it has $600,000 debt. The cost...
The total value of a Guess Co. is $3,000,000 and it has $600,000
debt. The cost of debt is 6.75% and the cost of equity is 15%. What
is the weighted-average cost of capital (WACC)?
The before-tax cost of debt for Guess Co. is 6.75% and the marginal
tax rate is 20%. What is the after-tax cost of debt for the
firm?
What is the after-tax cost of capital for Guess Co.?
Guess Co. is considering issuing additional stock to an investor
and retiring the debt. Should they?
What is the current prime rate? If a company can borrow at Prime
plus 2%, what is its cost of capital?
Homework Answers
Given total value of firm= $3,000,000 and debt= $600,000
So Equity= $3,000,000 - $600,000 = $2400000
Thus the Weight of debt (Wd) = $600,000 / $3,000,000
=20%
& Weight of Equity We = 80%
Also given Cost of debt (Rd) = 6.75% & Cost of Equity (Re )= 15%
So the weighted-average cost of capital (WACC) without considering the effect of Tax will be given by:
WACC= Wd * Rd + We * Re
= 20% x 6.75% + 80% * 15%
= 13.35%
Part 2.
Now given Tax rate (T) = 20%
So the after tax cost of debt is given by the formula
= 6.75 % ( 1-20%)
= 5.40%
Part 3.
Now using this after tax cost of debt, the after tax cost of captial will be:
= 5.4%*20% + 15%*80%
= 13.08%
Part 4.
No they should not issue additional stock by retiring debt. This is because there capital structure is already not optimal i.e. they are using less debt & more equity which is keeping their WACC high. Retiring debt & issuing more equity will further increase the WACC for the firm thus they should not do that.
Part 5.
The current prime rate is 4.75% (as on 25th November 2019). If the company can borrow at prime+2% , which happens to be 6.75%, the cost of capital will be the same as calculated above (Assuming that the capital structure remains the same) as the firm's cost of debt was already 6.75%
Add Answer to:
The total value of a Guess Co. is $3,000,000 and it has $600,000
debt. The cost...
Turnbull Co. has a target capital structure of 45% debt, 4% preferred stock, and 51% common...
Turnbull Co. has a target capital structure of 45% debt, 4% preferred stock, and 51% common equity. It has a before-tax cost of debt of 8.2%, and its cost of preferred stock is 9.3%. If Turnbull can raise all of its equity capital from retained earnings, its cost of common equity will be 12.4%. However, if it is necessary to raise new common equity, it will carry a cost of 14.2%. If its current tax rate is 40%, how much...
Consider the case of Turnbull Co. Turnbull Co. has a target capital structure of 58% debt,...
Consider the case of Turnbull Co. Turnbull Co. has a target capital structure of 58% debt, 6% preferred stock, and 36% common equity. It has a before-tax cost of debt of 8.2%, and its cost of preferred stock is 9.3%. If Turnbull can raise all of its equity capital from retained earnings, its cost of common equity will be 12.4%. However, if it is necessary to raise new common equity, it will carry a cost of 14.2%. If its current...
Consider the case of Turnbull Co. Turnbull Co. has a target capital structure of 58% debt,...
Consider the case of Turnbull Co. Turnbull Co. has a target capital structure of 58% debt, 6% preferred stock, and 36% common equity. It has a before-tax cost of debt of 11.1%, and its cost of preferred stock is 12.2%. If its current tax rate is 40%, how much higher will Turnbull's weighted average cost of capital (WACC) be if it has to raise additional common equity capital by issuing new common stock instead of raising the funds through retained...
Turnbull Co. has a target capital structure of 58% debt, 6% preferred stock, and 36% common...
Turnbull Co. has a target capital structure of 58% debt, 6% preferred stock, and 36% common equity. It has a before-tax cost of debt of 11.1%, and its cost of preferred stock is 12.2%. If its current tax rate is 40%, how much higher will Turnbull's weighted average cost of capital (WACC) be if it has to raise additional common equity capital by issuing new common stock instead of raising the funds through retained earnings? If Tumbull can raise all...
Turnbull Co. has a target capital structure of 58% debt, If its current tax rate is...
Turnbull Co. has a target capital structure of 58% debt, If its current tax rate is 40%, how much higher will 6% preferred stock, and 36% common equity. It has a Turnbull's weighted average cost of capital (WACC) be if before-tax cost of debt of 8.2%, and its cost of preferred it has to raise additional common equity capital by stock is 9.3%. issuing new common stock instead of raising the funds through retained earnings? If Turnbull can raise all...
please help Turnbull Co. has a target capital structure of 58% debt, 6% preferred stock, and...
please help
Turnbull Co. has a target capital structure of 58% debt, 6% preferred stock, and 36% common equity. It has a before-tax cost of debt of 11.1%, and its cost of preferred stock is 12.2% if its current tax rate is 40%, how much higher will Turnbull's weighted average cost of capital (WACC) be if it has to raise additional common equity capital by issuing new common stock instead of raising the funds through retained earnings? If Turnbull can...
Turnbull Co. has a target capital structure of 58% debt, 6% preferred stock, and 36% common equity. It has a before-tax...
Turnbull Co. has a target capital structure of 58% debt, 6% preferred stock, and 36% common equity. It has a before-tax cost of debt of 11.1%, and its cost of preferred stock is 12.2%. If Turnbull can raise all of its equity capital from retained earnings, its cost of common equity will be 14.7%. However, if it is necessary to raise new common equity, it will carry a cost of 16.8%. If its current tax rate is 40%, how much...
Turnbull Co. has a target capital structure of 58% debt, 6% preferred stock, and 36% common...
Turnbull Co. has a target capital structure of 58% debt, 6% preferred stock, and 36% common equity. It has a before-tax cost of debt of 11.1%, and its cost of preferred stock is 12.2%. If Turnbull can raise all of its equity capital from retained earnings, its cost of common equity will be 14.7%. However, if it is necessary to raise new common equity, it will carry a cost of 16.8%. A) If its current tax rate is 40%, how...
Turnbull Co. is considering a project that requires an initial investment of $1,708,000. The firm will raise the $1,708,000 in capital by issuing $750,000 of debt at a before-tax cost of 10.2%, $78,000 of preferred stock at a cost of 11.4%, and $880,000 o
Turnbull Co. is considering a project that requires an initial investment of $1,708,000. The firm will raise the $1,708,000 in capital by issuing $750,000 of debt at a before-tax cost of 10.2%, $78,000 of preferred stock at a cost of 11.4%, and $880,000 of equity at a cost of 14.3%. The firm faces a tax rate of 40%. What will be the WACC for this project?
Consider the case of Turnbull Co. Turnbull Co. has a target capital structure of 58% debt, 6% preferred stock, and 36% common equity. It has a before-tax cost of debt of 8.2%, and its cost of preferred stock is 9.3%. If Turnbull can raise all of its equity capital from retained earnings, its cost of common equity will be 12.4%. However, if it is necessary to raise new common equity, it will carry a cost of 14.2%. If its current...
Consider the case of Turnbull Co. Turnbull Co. has a target capital structure of 58% debt, 6% preferred stock, and 36% common equity. It has a before-tax cost of debt of 11.1%, and its cost of preferred stock is 12.2%. If its current tax rate is 40%, how much higher will Turnbull's weighted average cost of capital (WACC) be if it has to raise additional common equity capital by issuing new common stock instead of raising the funds through retained...
Turnbull Co. has a target capital structure of 58% debt, 6% preferred stock, and 36% common equity. It has a before-tax cost of debt of 11.1%, and its cost of preferred stock is 12.2%. If its current tax rate is 40%, how much higher will Turnbull's weighted average cost of capital (WACC) be if it has to raise additional common equity capital by issuing new common stock instead of raising the funds through retained earnings? If Tumbull can raise all...
Turnbull Co. has a target capital structure of 58% debt, If its current tax rate is 40%, how much higher will 6% preferred stock, and 36% common equity. It has a Turnbull's weighted average cost of capital (WACC) be if before-tax cost of debt of 8.2%, and its cost of preferred it has to raise additional common equity capital by stock is 9.3%. issuing new common stock instead of raising the funds through retained earnings? If Turnbull can raise all...
please help
Turnbull Co. has a target capital structure of 58% debt, 6% preferred stock, and 36% common equity. It has a before-tax cost of debt of 11.1%, and its cost of preferred stock is 12.2% if its current tax rate is 40%, how much higher will Turnbull's weighted average cost of capital (WACC) be if it has to raise additional common equity capital by issuing new common stock instead of raising the funds through retained earnings? If Turnbull can...
Turnbull Co. has a target capital structure of 58% debt, 6% preferred stock, and 36% common equity. It has a before-tax cost of debt of 11.1%, and its cost of preferred stock is 12.2%. If Turnbull can raise all of its equity capital from retained earnings, its cost of common equity will be 14.7%. However, if it is necessary to raise new common equity, it will carry a cost of 16.8%. If its current tax rate is 40%, how much...
Most questions answered within 3 hours.
-
Which expression computes a pseudorandom integer between -10 and
10 using rand()
from cstdlib?
A. (rand(...
asked 1 minute from now -
Roybus, Inc., a manufacturer of flash memory, just reported that
its main production facility in Taiwan...
asked 6 minutes ago -
Two capacitors connected in parallel produce an equivalent
capacitance of 45.0 μF but when connected in...
asked 15 minutes ago -
The differences between the two sets of dependent data are -1,
2,-,2, 2. Round to the...
asked 32 minutes ago -
A χ2-curve, looking at the relationship between age and hours
spent working at an office per...
asked 1 hour ago -
The pH of a sample of water from a river is 5.0. A
sample of effluent from...
asked 1 hour ago -
At the beginning of the period, the Fabricating Department
budgeted direct labor of $136,500 and equipment...
asked 2 hours ago -
Please answer all
____ 28. Rent control is usually
justified on the grounds that it protects...
asked 2 hours ago -
PARTS A-D HAVE BEEN ANSWERED. WAS TOLD TO REPOST. ONLY ANSWER
PARTS E and F.
A...
asked 2 hours ago -
2) You are given the task of finding a representation for a
circle in a drawing...
asked 3 hours ago -
STUDY QUESTION: Does use of diet drug fen-phen
(fenfluramine-phentermine) cause valvular heart disease?
HINT: Valvular heart...
asked 3 hours ago -
1. An object weighing 40 N rests on a surface. The coefficient
of friction is 0.35....
asked 4 hours ago