13. a) Luna Corporation has a beta of 1.5, 10 billion in equity, and 5 billion...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
13. a) Luna Corporation has a beta of 1.5, £10 billion in equity, and £5 billion in debt with an interest rate of 4%. Assume a risk-free rate of 0.5% and a market risk premium of 6%. Calculate the WACC without tax. (30 marks) b) Queen Corporation has a debt-to-equity ratio of 1.8. If it had no debt, its cost of equity would be 16%. Its current cost of debt is 10%. What is the cost of equity for the firm if the corporate tax rate is 35%? (20 marks) c) Discuss the impact of corporate taxes on the optimal capital structure of the firm in an otherwise perfect capital market. (50 marks) 13. a) Luna Corporation has a beta of 1.5, £10 billion in equity, and £5 billion in debt with an interest rate of 4%. Assume a risk-free rate of 0.5% and a market risk premium of 6%. Calculate the WACC without tax. (30 marks) b) Queen Corporation has a debt-to-equity ratio of 1.8. If it had no debt, its cost of equity would be 16%. Its current cost of debt is 10%. What is the cost of equity for the firm if the corporate tax rate is 35%? (20 marks) c) Discuss the impact of corporate taxes on the optimal capital structure of the firm in an otherwise perfect capital market. (50 marks)
Expert Answer:
Answer rating: 100% (QA)
a To calculate the Weighted Average Cost of Capital WACC without tax for Luna Corporation we can use the following formula WACC E V Re D V Rd Where E ... View the full answer
Related Book For
Corporate Finance A Focused Approach
ISBN: 978-1305637108
6th edition
Authors: Michael C. Ehrhardt, Eugene F. Brigham
Posted Date:
Students also viewed these banking questions
-
You are provided with the following information for Guillaume Inc. for the month ended June 30, 2012. Guillaume uses the periodic method for inventory. Instructions(a) Calculate (i) ending inventory...
-
The following table shows the U.S. market share for smartphone manufacturers in 2013 according to the research firm comScore. The table also shows the frequency of purchases of smart phones by brand...
-
The following table shows the masses, m grams, of 100 unsealed bags of plain potato crisps. a. Show that the heights of the columns in a histogram illustrating these data must be in the ratio 2 : 3 :...
-
Tri-State Railroad Company organizes its three divisions, the Southeast (SE), East (E), and South (S) regions, as profit centers. The chief executive officer (CEO) evaluates divisional performance,...
-
This is the same problem as Problem 6-14, but assuming the use of the complete equity method.) On January 1, 2013, Perry Company purchased 80% of Selby Company for $960,000. At that time Selby had...
-
In one day, Juan sends Keith three times as many messages as he sends Laurence, and Laurence sends Missy 4.5 times as many messages as he receives from Juan. If Missy received 18 messages from...
-
On March 1,2020 , Sandollar Inc. issued \(\$ 30,000\) of bonds at 105 , paying \(8 \%\) cash interest semiannually on June 30 and December 31. The bonds are scheduled to mature December 31, 2023. On...
-
World Gourmet Coffee Company (WGCC) is a distributor and processor of different blends of coffee. The company buys coffee beans from around the world and roasts, blends, and packages them for resale....
-
Flexible Budget for Assembly Department Cabinaire Inc. is one of the largest manufacturers of office furniture in the United States. In Grand Rapids, Michigan, it assembles filing cabinets in an...
-
You are the IT director at Big Ten University. As part of a training program, you decide to draw a DM that includes some obvious mistakes to see whether your newly hired junior analysts can find...
-
please answer in full work provide narrations also use commas and dollar sign
-
In the CAPM formula, what is typically used as an estimate of the risk - free rate?
-
A project costs 2 5 0 0 0 pounds for the period of 3 years with an annual income of 3 0 0 0 each year calculate the net present value of at the discount rate of 4 % for each year.
-
What is overflow? What is carry? What is RTL? Give an example using the NOT instruction What is the difference of a ASL instruction and a ROL instruction? Show how to convert 13.625 into into binary...
-
Write as a single logarithm & explain your steps.
-
A spaceship is traveling through deep space to a space station and needs to make a course correction to go around a nebula. The captain orders the ship to travel 1.9 x 106 kilometers before turning...
-
1) Dmitri Chekov has learned that his great-aunt intends to give him $5,160 each year he is studying at university. Tuition must be paid in advance, so Dmitri Chekov would like to receive his...
-
What is the expected payoff of an investment that yields $5,000 with a probability of 0.15 and $500 with a probability of 0.85? Select one: O a. $325 O b. $5,500 O c. $2,750 O d. $1,175
-
What are the nominal and effective costs of trade credit under the credit terms of 3 15, net 30? Discuss.
-
Counts Accounting's beta is 1.15 and its tax rate is 40%. If it is financed with 20% debt, what is its unlevered beta? Discuss.
-
Explain how to use the free cash flow valuation model to find the price per share of common equity.
-
The following questions deal with generally accepted auditing standards (GAAS) and quality control procedures. Select the one response that is best for each question. a. The general standard, which...
-
The following questions deal with types of audits and auditors. Select the best response for each question. a. Operational audits generally have been conducted by internal auditors and governmental...
-
In the normal course of performing their responsibilities, auditors frequently conduct examinations or reviews of the following: 1. Federal income tax returns of an officer of a corporation to...
Study smarter with the SolutionInn App