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Problem - Weighted Average Cost of Capital - Kareem Construction Company has the following amounts of interest-bearing debt and common equity capital:
FINANCING SOURCE
DOLLAR AMOUNT
INTEREST RATE
COST OF CAPITAL
Short-term loan
$200,000
12%
Long-term loan
14%
Equity capital
$600,000
22%
Kareem Construction is in the 30 percent average tax bracket.
Required -
A. Calculate the after-tax WACC for Kareem.
B. Show how Kareem's WACC would change if the tax rate dropped to 25 percent and the estimated cost of equity capital were based on a risk-free rate of 7 percent, a market risk premium of 8 percent, and a systematic risk measure or beta of 2.0.
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