Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

DARKSENT INC currently is a cloud computing firm but is considering expanding into producing laptop customers. In its current form, Darksent has a WACC of

DARKSENT INC currently is a cloud computing firm but is considering expanding into
producing laptop customers. In its current form, Darksent has a WACC of 9.8% and
they have a target capital structure of 40% and 60% equity .Darksent also has a tax rate
of 20%.
Darksent realizes that using its current WACC is to evaluate an expansion into this new
line of business is not good practice. Therefore, it has gathered data on two firms that
has expanded into other sector of the cloud computing business to guide their
calculations of an appropriate cost of capital. Using this data, calculate a cost of equity
for Darksent proposed expansions into computer manufacturing. Company A and
Company B have a tax rate of 30%. Assume a risk free rate of 4.0% and a market risk
premium of 7%.
B. If Rarksent uses a pre tax cost of debt is 7% for their laptop divisions and their tax
rate is 20%, what is the cost of capital(WACC) they should use to evaluate this
expansion?
C. Suppose Darksent has conducted an EBIT- EPS analysis, and the breaker EBIT is
determined to be $34 million. Suppose their average EBIT is $42 million with a standard
deviation of $8.5 million. What is the chance Darksent will not earn their breakeven
EBIT? What does EBIT-EPS analysis suggest about the risk of choosing debt as
opposed to equity?(3 points)
Can you please walk me through this step by step?
image text in transcribed

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored 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

Recommended Textbook for

Handbook Of Asian Finance Financial Markets And Sovereign Wealth Funds

Authors: David Lee, Greg N. Gregoriou

1st Edition

0128009829, 978-0128009826

More Books

Students also viewed these Finance questions

Question

Explain the factors influencing wage and salary administration.

Answered: 1 week ago

Question

Examine various types of executive compensation plans.

Answered: 1 week ago

Question

1. What is the meaning and definition of banks ?

Answered: 1 week ago

Question

a. When did your ancestors come to the United States?

Answered: 1 week ago

Question

d. What language(s) did they speak?

Answered: 1 week ago

Question

e. What difficulties did they encounter?

Answered: 1 week ago