Firm As capital structure contains 20% debt and 80% equity. Firm Bs capital structure contains 50% debt

Question:

Firm A‘s contains 20% debt and 80% equity. Firm B’s contains 50% debt and 50% equity. Both firms pay 7% annual interest on their debt. The stock of Firm A has a beta of 1.0, and the stock of Firm B has a beta of 1.375. The risk-free rate of interest equals 4%, and the on the market equals 12%.
a. Calculate the WACC for each firm, assuming there are no taxes.
b. Recalculate the WACC for each firm, assuming that they face a tax rate of 34%.
c. Explain how taking taxes into account in part (b) changes your answer from part (a).
Capital Structure
Capital structure refers to a company’s outstanding debt and equity. The capital structure is the particular combination of debt and equity used by a finance its overall operations and growth. Capital structure maximizes the market value of a... Expected Return
The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these... Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...