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Please provide answers and show work, thank you very much! 21. Omega Corporation has 10 million shares outstanding, now trading at $55 per share. The
Please provide answers and show work, thank you very much!
21. Omega Corporation has 10 million shares outstanding, now trading at $55 per share. The firm has estimated the expected rate of return to shareholders at about 12%. It has also issued long-term bonds at an interest rate of 7%. It pays tax at a marginal rate of 35%. a. What is Omega's after-tax WACC? b. How much higher would WACC be if Omega used no debt at all? (Hint: For this problem you can assume that the firm's overall beta (BA) is not affected by its capital structure or the taxes saved because debt interest is tax-deductible.) 21. [Note: In the following solution, we have assumed that $200 million of long-term bonds have been issued.] 25 20 15 Cost of equity (re) Rates of return, % Opportunity cost of capital (r) WACC 10 Cost of debt (D) 5 1 O O O O 0.2 0.4 0.6 0.8 1.8 2 2.2 i '12' 1.4 1.6 Debt-equity ratio (D/E) 2.4Step by Step Solution
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