XYZ company faces variable costs of debt and equity depending on the capital structure of the firm as given in table below.
(a) Calculate the weighted average cost of capital (WACC) at each tax rate (from 10% to 70% by increments of 10%) by filling out the table on next page. Make sure to report weighted average cost of capital numbers at 4 decimal places of accuracy such as 12.3456% or 1.0023%.
Hint: You can easily do mistakes if you make manual calculations. Instead, you might want to use Microsoft Excel to create a spreadsheet model where you repeatedly keep changing tax
(b) What is the minimum weighted average cost of capital at each tax rate?
10% tax rate | 20% tax rate | 30% tax rate | 40% tax rate | 50% tax rate | 60% tax rate | 70% tax rate | |
Weighted Average Cost of Capital |
(c) What is the optimal capital structure at each tax rate?
10% tax rate | 20% tax rate | 30% tax rate | 40% tax rate | 50% tax rate | 60% tax rate | 70% tax rate | |
Optimal Capital Structure |
D= __% E= __% |
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D= __% E= __% |
D= __% E= __% |
D= __% E= __% |
D= __% E= __% |
D= __% E= __% |
I have done all the calculation below :
Please let me know incase you have any query.
XYZ company faces variable costs of debt and equity depending on the capital structure of the...
How to calculate weighted average cost of capital WACC at various tax rates? show process Weighted Average Cost of Capital (WACC) at various tax rates Proportion of Debt [= D/(D+E) ] 0% Cost of Debt Cost of Equity 10% tax rate 20% tax rate 30% tax rate 40% tax rate 50% tax rate 60% tax rate 70% tax rate 1 4.50% 9.25% 5% 4.65% 9.50% 10% 4.85% 9.80% 15% 10.15% 5.10% 5.40% 20% 10.55% DI 25% 5.80% 11.00% 30% 6.30%...
Globex Corp. has a capital structure that consists of 40% debt and 60% equity. The firm's current beta is 1.10, but management wants to understand Globex Corp.'s market risk without the effect of leverage. If Globex Corp. has a 40% tax rate, what is its unlevered beta? 0.91 0.75 0.79 0.71 Now consider the case of another company: U.S. Robotics Inc. has a current capital structure of 30% debt and 70% equity. Its current before-tax cost of debt is 6%,...
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Consider the following current capital structure and two potential variations to the capital structure for KLM Corporation: Current Financial Mix 1 Financial mix 2 Proportion of debt 50% 40% 60% Proportion of equity 50% 60% 40% Pre-Tax cost of debt 5.25 5.0% 5.5% Cost of equity 7.9% 7.5% 8.3% Corporate tax rate 30% (a) Calculate the weighted average cost of capital for KLM Corporation under the three separate capital structures, i.e. Current, Mix 1 and Mix 2. Write your answers...
Question 2 5 pts Our firm's capital structure based on market values is 30% debt and 70% equity. The firm's before tax cost of debt is 5%, its cost of equity is 10%, and its tax rate is 40%. Currently, the target value weight of debt is 40% and the target value weight of equity is 60%. What would be the firm's weighted average cost of capital (WACC) based on this information? 7.20% 8.75% 8.25% 7.90% 8.50%
U.S. Robotics Inc. has a current capital structure of 30% debt and 70% equity. Its current before-tax cost of debt is 8%, and its tax rate is 35%. It currently has a levered beta of 1.15. The risk-free rate is 3.5%, and the risk premium on the market is 7.5%. U.S. Robotics Inc. is considering changing its capital structure to 60% debt and 40% equity. Increasing the firm's level of debt will cause its before-tax cost of debt to increase...
Globex Corp. currently has a capital structure consisting of 30% debt and 70% equity. However, Globex Corp.’s CFO has suggested that the firm increase its debt ratio to 50%. The current risk-free rate is 3.5%, the market risk premium is 8%, and Globex Corp.’s beta is 1.25. If the firm’s tax rate is 25%, what will be the beta of an all-equity firm if its operations were exactly the same? Now consider the case of another company: US Robotics Inc....
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