Please show step by step how to solve the problem.

Answer: 13.97

1.) Blue Mamba bed and breakfast uses equity and debt in their capital structure (no preferred). They target 55% as their preferred debt percentage.

Their marginal tax rate is 26% and their before tax cost of debt is 3.8%.

Their beta is 3.0.

The 3 month treasury rate is 0.3% and the S&P 500 return is expected to be be 9.4%.

What is Black Mamba's weighted average cost of capital (WACC)?

Post your result to two decimal places.

To calculate the WACC you need the after-tax cost of debt, % of debt , cost of equity , % of equity.

1. After tax cost of debt = cost of debt *(1-marginal tax rate)

2. % of debt is given

3. cost of equity can be calculated using the CAPM, Rs = RF + [* (Rm RF)]

RF = treasury rate

B= beta is given

Rm= market return is proxied by the S&P 500 return

4. % of equity = 100-% of debt.

WACC = % of debt * after tax cost of debt + % of equity * return expected on the firm

Thank you.

Please show step by step how to solve the problem.

Answer:8.95

2.) If the tax rate is 26% and the cost of debt is 12.1%, what is the after tax cost of debt?

Post your answer with 2 decimal places.

cost of debt * (1- marginal tax rate)

Before Tax Cost * ( 1 - ISTR)

Thank you.

Please show step by step how to solve the problem.

Answer: 225,803

3.) Your boss wants to know how much he can spend before his cost for debt increases. Therefore he wanted to find the breakpoint based on their capital structure. The firm can borrow $88,063. After this amount the cost will increase substantially. They have 61% of equity in their capital structure and no preferred stock. Estimate the breakpoint in the Marginal Cost for debt.

Post your answer to the whole number. No decimals.

225,803

Breakpoint for new cash source = Available Retained Earnings/target % of Total capital

If there is no preferred, the % of total capital for debt = 100-% of equity.