1. PABG has the following capital structure: Total Assets $400,000 Debt $140,000 Equity $260,000 Pre-tax Income...

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1. PABG has the following capital structure: Total Assets $400,000 Debt $140,000 Equity $260,000 Pre-tax Income $10,000,000 N

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Answer 1

Answer #1

a) After tax cost of debt = Pretax cost * (1 - Tax Rate)

Tax Rate = 1 - (Net Income/Pretax Income)

Tax Rate = 1 - ($7,000,000/$10,000,000) = 1 - 70% = 30%

After tax cost of debt = 8.5% * (1 - 30%) = 5.95%

b)

WACC is represented as: WACC = [Weight of debt * Cost of debt * (1 - Tax)] + [Weight of equity * Cost of equity]

Weight of debt = $140,000/$400,000 = 35.00%

Weight of equity = $260,000/$400,000 = 65.00%

WACC = 35% * 8.5% * (1 - 30%) + 65% * 11.3%

WACC = 9.43%

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Answer 2

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