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a. Why a company's actions to increase its operating leverage results in increasing the company's equity Beta? Explain.
b. Company P's capital structure contains 10% debt and 90% equity. Company Q's capital structure contains 50% debt and 50% equity. Both companies pay 8% annual interest on their debt. Shares of Company P has a Beta of 1.1 and the shares of Company Q have a Beta of 1.45. The risk-free rate of interest equals 5%, and the expected return on the market portfolio equals 12%.
Required:
Refer to the information in (b) above and answer the following questions:
i. Calculate the Weighted Average Cost of Capital (WACC) for both companies assuming there is no taxes.
ii. Recalculate the WACC for both companies assuming there is a tax rate of 30%
iii. Which company is benefited more for the tax effect on its WACC? Why?
Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..
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