Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Evans Technology has the following capital structure. Debt 3 0 % Common equity 7 0 The aftertax cost of debt is 7 . 5 0

Evans Technology has the following capital structure.
Debt 30%
Common equity 70
The aftertax cost of debt is 7.50 percent, and the cost of common equity (in the form of retained earnings) is 14.50 percent.
What is the firms weighted average cost of capital and debt and common equity?
Note: Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.
An outside consultant has suggested that because debt is cheaper than equity, the firm should switch to a capital structure that is 50 percent debt and 50 percent equity.
Under this new and more debt-oriented arrangement, the aftertax cost of debt is 8.50 percent, and the cost of common equity (in the form of retained earnings) is 16.50 percent.
Recalculate the firm's weighted average cost of capital.
Note: Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.
Which plan is optimal in terms of minimizing the weighted average cost of capital?
multiple choice
Plan A
Plan B

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_2

Step: 3

blur-text-image_3

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

The Global Financial Crisis What Have We Learnt

Authors: Steven Kates

1st Edition

0857934228, 978-0857934222

More Books

Students also viewed these Finance questions