Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

A firm has a cost of equity of 13%, a cost of preferred of 11%, an after-tax cost of debt of 5.2% and a tax

image text in transcribed

image text in transcribed

A firm has a cost of equity of 13%, a cost of preferred of 11%, an after-tax cost of debt of 5.2% and a tax rate of 35%. Given this, which one of the following will increase the firm's weighted average cost of capital? a. Redeeming shares of common share ob. Increasing the firm's tax rate Oc. Increasing the firm's beta The cost of capital for a project should: a. be adjusted based on the risk of the project. O b.be adjusted based on the size of the project. O c.meet or exceed the internal rate of return of the project. O d. never exceed the cost of capital for the overall firm. Marshal Ltd currently has $250 million of market value debt outstanding. The 9 percent coupon bonds (semiannual pay) have a maturity of 15 years and are currently priced at $877.07 per bond. The company also has an issue of 2 million perpetual preference shares outstanding with a market price of $27. The perpetual preference shares offer an annual dividend of $1.20. Imaginary also has 14 million shares of ordinary shares outstanding with a price of $20.00 per share. The company is expected to pay a $2.20 dividend one year from today, and that dividend is expected to increase by 8 percent per year forever. The company's tax rate is 40 percent. Fill in the blanks A-E below: (Omit the percent sign in your answer. Carry out all calculations to four decimal places and round your final answer to two decimal places, for example 7.80%.) (Omit the percent sign in your answer. Carry out all calculations to four decimal places and round your final answer to two decimal places, for example 7.80%.) 1. Pre-tax cost of debt = % 2. Cost of equity = % 3. Cost of perpetual preference shares = % 4. Total Capital = $ 5. Weights for: a. Debt = % % b. Perpetual preference shares = c. Equity = % 6. Cost of Capital (WACC) = %

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access with AI-Powered Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Students also viewed these Accounting questions