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Solve for wacc and cost of equity

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Reference no: EM133123004

Solve for WACC and Cost of Equity. please show step by step and formulas.

  1. Using the scenarios in case Exhibit 32.9, what role does leverage play in affecting the cost of equity and the weighted average cost of capital (WACC) for CPK? Use market values of debt and equity to compute the cost of equity and WACC.

California Pizza Kitchen

Pro Forma Tax Shield Effect of Recapitalization Scenarios (dollars in thousands, except share data; figures based on end of June 2007)

 

 

Debt/Total Capital

 

Actual

10%

20%

30%

Interest rate

6.16%

6.16%

6.16%

6.16%

Tax rate

32.5%

32.5%

32.5%

32.5%

Earnings before income taxes and interest

30,054

30,054

30,054

30,054

Interest expense

0

1,391

2,783

4,174

Earnings before taxes

30,054

28,663

27,271

25,880

Income taxes

9,755

9,303

8,852

8,400

Net income

20,299

19,359

18,419

17,480

 

 

 

 

 

Book value:

 

 

 

 

Debt

0

22,589

45,178

67,766

Equity

225,888

203,299

180,710

158,122

Total capital

225,888

225,888

225,888

225,888

 

 

 

 

 

Market value:

 

 

 

 

Debt

0

22,589

45,178

67,766

Equity

643,773

628,516

613,259

598,002

Market value of capital

643,773

651,105

658,437

665,769

 

 

 

 

 

Cost of equity

9.5%

 

 

 

WACC

9.5%

 

 

 

Reference no: EM133123004

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