Firm weighted average cost of capital

Assignment Help Finance Basics
Reference no: EM132719691

Evans Technology has the following capital structure.

Debt25%Common equity75 

The aftertax cost of debt is 7.00 percent, and the cost of common equity (in the form of retained earnings) is 14.00 percent.

a. What is the firm's weighted average cost of capital? (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)

An outside consultant has suggested that because debt is cheaper than equity, the firm should switch to a capital structure that is 50 percent debt and 50 percent equity.

Under this new and more debt-oriented arrangement, the aftertax cost of debt is 8.00 percent, and the cost of common equity (in the form of retained earnings) is 16.00 percent.

b. Recalculate the firm's weighted average cost of capital. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)

c. Which plan is optimal in terms of minimizing the weighted average cost of capital?

Multiple choice

  • Plan B
  • Plan A

Reference no: EM132719691

Questions Cloud

What is the loss on repossession for the year ended december : What is the entity's realized gross profit for the year ended December 31, 2018? What is the loss on repossession for the year ended December 31, 2019?
What is the cost of goods sold using FIFO inventory method : A physical count of merchandise inventory at the end of the month revealed that 500 units were sold. What is the cost of goods sold using the FIFO inventory
Description of future leadership development goals and state : Description of future leadership development goals and state. Explain how each weekly topic will help you meet your leadership development goals
Analyze the importance of developmental assessments : Infant, childhood, and adolescent development are a continual interplay between nature (genetic or biologic predisposition) and nurture.
Firm weighted average cost of capital : Evans Technology has the following capital structure.
What is the in dollars for next year : 1125 units, and management likes to have enough inventory at the end of the year for 2% of next year's sales. What is the (in dollars) for next year?
Determine the cost recovery for the asset : Hazel did not elect § 179 or additional first-year depreciation. On August 20, 2019, Hazel sold the asset. Determine the cost recovery for 2019 for the asset.
Calculate income attributable to non-controlling interest : Marsh paid $5,000 in dividends to shareholders on record as at December 31, 2020. Calculate income attributable to non-controlling interest for 2020
Current understanding of effective assessment practices : Explain your current understanding of effective assessment practices including the difference between summative and formative assessment

Reviews

Write a Review

Finance Basics Questions & Answers

  Understand the difference among coupon yield

Demonstrate that you understand the difference among coupon yield, current yield, and yield to maturity with the following illustration for Morgan Stanley debt, par value of $1000: current price of $1032, coupon rate of 4.2%, issue date of Septemb..

  Draw a diagram showing the profits for each position

Draw a diagram showing the profits for each position for each price of gold. (c) Which option has the lowest risk? Explain

  Difference between nominal effective exchange

Please explain Power Purchasing Parity and the difference between Nominal Effective Exchange Rate and Real Effective Exchange Rate

  How large should the capital budget be

Moussawi Enterprises, which finances only with equity from retained earnings, is considering two large capital budgeting projects, and its CFO hired you to assist in deciding whether one, both, or neither of the projects should be accepted.

  What will their annual income be

The DeVaneys' gross monthly income is $4,315. If their annual income increases 3% per year for the next five years, what will their annual income be?

  Calculate free cash flow for a pure equity firm

Free Cash Flow for a Pure Equity Firm (Easy) The following information is from the financial report of a pure equity company (one with no net debt).

  Explain which one would prefer less volatility

If they have different attitudes, state and explain which one would prefer less volatility and which one more volatility?

  Explain the company a wacc

Company A has a target debt/equity ratio of .35. Its cost of equity is 5.67 percent, and its before tax cost of debt is 3.59 percent.

  Calculate the net present value of each of the alternatives

As a financial analyst at Glencolin International (GI) you have been asked to evaluate two capital investment alternatives submitted by the production department of the firm. Before beginning your analysis, you note that company policy has set the co..

  Illustrate how book value each share

Illustrate how book value each share, earning each share also dividends each share change over years.

  Pay out 70 percent as dividends if the firm wants to limit

triumph company has total assets worth 6413228. next year it expects a net income of 3145778 and will pay out 70

  How much ge will receive after flotation costs are paid

Show how much of the total amount issued will consist of flotation costs and how much GE will receive after flotation costs are paid.

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd