ZuoTi.Pro
Question
A company has 1 million in the 2 million in common equity and 2 million in preferred equity the after tax cost of debt is 8% The beta for the common equity is 1.5 the preferred stocks expected return is 5% currently treasury bills are yielding 2% while the market portfolio is yielding 8% assuming a 40% tax rate solve the company is WACC

A company has $1M in Debt, $2M in common equity and $2M in preferred equity. The after-tax cost of debt is 8%. The beta for t
business   finance   
0 0
Add a comment Improve this question Transcribed image text
Next > < Previous
Sort answers by oldest

Homework Answers

Answer #1

rate positively ..

Compuatation of cost of equity
Cost of equity = Risk free rate + (market rate - Risk free rate)*Beta
2%+(8%-2%)*1.5
11.00%
Computation of WACC
i ii iii iv=iii*ii
Source Value (mil) Weight Cost Weight *Cost
Debt 1 20% 8.00% 1.600%
preferred stock 2 40% 5.00% 2.000%
Common stock 2 40% 11.00% 4.400%
Total 5 8.000%
Therefore WACC = 8.0%
Ans is option = 8.0%
0 0
Add a comment
Know the answer?
Add Answer to:
A company has 1 million in the 2 million in common equity and 2 million in...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions

  • Your company has three million shares of common stock outstanding with a current market price of...

    Your company has three million shares of common stock outstanding with a current market price of $18. The market risk premium is 7.5%, and Treasury bills are yielding 6.25 percent. There are also 32,000 bonds outstanding with an 8 percent annual coupon, 18 years to maturity, and currently sell for $940. If the stock has a beta of 1.20 and the applicable tax rate is 40%, what is the WACC for your company?

  • QUESTION 3 (a) A company finances its operations with 40 percent debt and 60 percent equity....

    QUESTION 3 (a) A company finances its operations with 40 percent debt and 60 percent equity. The annual yield on the company’s debt is rd = 10% and the company’s tax rate is T = 30%. The company’s common stock trades at Po = K55 per share, and its current dividend of Do =K5 per share is expected to grow at a constant rate of g = 10% a year. The flotation cost of external equity, if it is issued,...

  • A corporation has 1 million shares of common stock outstanding. The beta of the common stock...

    A corporation has 1 million shares of common stock outstanding. The beta of the common stock is estimated to be 1.75. The rate of return on Treasury bills that are used as a proxy for risk-free return is estimated to be 4 percent. At the same period, the rate of return on a portfolio used for a proxy for a market portfolio will be 12 percent. What is the after tax cost of equity? Assume that the tax rate is...

  • Raymond Mining Corporation has 9.1 million shares of common stock outstanding, 350,000 shares of 4% $100...

    Raymond Mining Corporation has 9.1 million shares of common stock outstanding, 350,000 shares of 4% $100 par value preferred stock outstanding, and 155,000 7.50% semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $39 per share and has a beta of 1.55, the preferred stock currently sells for $95 per share, and the bonds have 10 years to maturity and sell for 110% of par. The market risk premium is 7.9%, T-bills are yielding 5%, and...

  • Raymond Mining Corporation has 9.1 million shares of common stock outstanding, 350,000 shares of 4% $100...

    Raymond Mining Corporation has 9.1 million shares of common stock outstanding, 350,000 shares of 4% $100 par value preferred stock outstanding, and 155,000 7.50% semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $39 per share and has a beta of 1.55, the preferred stock currently sells for $95 per share, and the bonds have 10 years to maturity and sell for 110% of par. The market risk premium is 7.9%, T-bills are yielding 5%, and...

  • A company has 8.6 million shares of common stock outstanding, 300,000 shares of 5 percent preferred...

    A company has 8.6 million shares of common stock outstanding, 300,000 shares of 5 percent preferred stock outstanding, and 160,000 7.4 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $34 per share and has a beta of 1.30, the preferred stock currently sells for $84 per share, and the bonds have 15 years to maturity and sell for 115 percent of par. The market risk premium is 7.4 percent, T-bills are yielding 3 percent,...

  • A company has 9.1 million shares of common stock outstanding, 350,000 shares of 4 percent preferred...

    A company has 9.1 million shares of common stock outstanding, 350,000 shares of 4 percent preferred stock outstanding, and 185,000 7.9 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $39 per share and has a beta of 1.55, the preferred stock currently sells for $89 per share, and the bonds have 10 years to maturity and sell for 110 percent of par. The market risk premium is 7.9 percent, T-bills are yielding 5 percent,...

  • A company has 9.3 million shares of common stock outstanding, 370,000 shares of 6 percent preferred...

    A company has 9.3 million shares of common stock outstanding, 370,000 shares of 6 percent preferred stock outstanding, and 195,000 8.1 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $41 per share and has a beta of 1.15, the preferred stock currently sells for $91 per share, and the bonds have 20 years to maturity and sell for 112 percent of par. The market risk premium is 8.1 percent, T-bills are yielding 4 percent,...

  • Miller Manufacturing has a target debt-to-equity ratio of 0.60. Its cost of equity is 14 percent,...

    Miller Manufacturing has a target debt-to-equity ratio of 0.60. Its cost of equity is 14 percent, and its cost of debt is 8 percent. If the tax rate is 38 percent, what is Miller's WACC? (Do not round intermediate calculations. Round the final answer to 2 decimal places.) WACC % 6.66 points Raymond Mining Corporation has 9.3 million shares of common stock outstanding, 370,000 shares of 6% $100 par value preferred stock outstanding, and 159,000 7.50% semiannual bonds outstanding, par...

  • Hilton Corporation has 1 million shares of common stock outstanding and 175,000 bonds with 6% coupon...

    Hilton Corporation has 1 million shares of common stock outstanding and 175,000 bonds with 6% coupon at $1000 par each. The stock currently sells at $53 per share and has a beta of 1.15; the bonds have 25 years to maturity and sell at $1141. The market risk premium is 6.8% and Treasury bills are yielding 3.1%. If Hilton’s corporate tax rate is 21%, what is the company’s cost of capital (WACC)?

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
Active Questions
ADVERTISEMENT