Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

You are trying to calculate the WACC for two firms. Firm XiG is publicly traded and firm TanW is a private firm. You have collected

You are trying to calculate the WACC for two firms. Firm XiG is publicly traded and firm TanW is a private firm. You have collected all necessary information for your WACC calculation:

In terms of liabilities, XiG has account payables of $400Million and a bank loan of $200Million. XiG also has cash holding of $300Million. XiG is current trading at $520/share with 1 Million shares outstanding. XiGs returns move one to one with the stock market returns.

XiGs average tax rate is 30% and marginal tax rate of 35%. XiG is rated as Aa1 by Moodys and similar Aa1 rating firms have cost of debt of 2%. Risk free rate is 1%, market risk premium is 5%.

TanW is in the same industry as XiG. After consulting with an industry expert, you are confident that TanW and XiG have roughly the same business risk. Currently, TanW has net debt to equity ratio of 2. TanWs average tax rate is 30% and marginal tax rate of 35%. Its cost of debt is 3%.

Now you proceed to calculate the WACC for both firms.

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

Students also viewed these Finance questions

Question

What does an IDREF attribute validate?

Answered: 1 week ago

Question

=+d) Find that margin of error.

Answered: 1 week ago

Question

=+1. What is the brand's character or personality?

Answered: 1 week ago

Question

=+3. Who is the audience?

Answered: 1 week ago

Question

=+4. What do they (audience members) currently think?

Answered: 1 week ago