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The effect of tax rate on WACC
K. Bell Jewelers wishes to explore the effect on its cost of capital of the rate at which the company pays taxes. The firm wishes to maintain a capital structure of 40% debt, 10% preferred stock, and 50% common stock. The cost of financing with retained earnings is 10%, the cost of prefferred stock financing is 8%, and the before-tax cost of debt financing is 6%. Calculate the weighted average cost of capital (WACC) given the tax assumptions in parts a to c.
a. Tax rate = 40%
b. Tax rate = 35%
c. Tax rate = 25%
d. Describe the relationship between changes in the rate of taxation and the weighted average cost of capital.
Assume that interest rate parity holds and that 90-day risk-free securities yield 5% in the United States and 5.3% in Germany. In the spot market, 1 euro equals $1.40. What is the 90-day forward rate? Is the 90-day forward rate trading at a premium o..
Suppose you own stock in a company. the current per share is $25. Another company has just announced that it wants to buy your company and will pay $35 per share to acquire all the outstanding stock. your company's management immediately begins fight..
Company xyz expects to generate FCFs of $15 M next year. This will grow for 5 years at 12%, after which the company will continue to grow at the risk-free rate of 2%. Calculate SmartTag’s WACC. Using a DCF valuation, determine the enterprise value fo..
A 4-year bond, that has a face value of $100 and pays a coupon of 5% annually, is selling at a yield-to-maturity of 6%. Calculate the price and the duration of the bond.
The more cash the firm uses to repurchase shares, the less it has available to pay dividends. Free cash flow measures the cash generated by the firm after payments to debt or equity holders are considered. We estimate a firm's current enterprise valu..
You want to have $2 million in real dollars in an account when you retire in 40 years. The nominal return on your investment is 10 percent and the inflation rate is 3.8 percent. What real amount must you deposit each year to achieve your goal?
With the mission of maximizing shareholder value in mind, how could the health care financial manager help to motivate a large group of employees to exceptional performance? Explain in detail. Should the financial manager have any influence on care m..
A five-year project has an initial fixed asset investment of $315,000, an initial NWC investment of $31,000, and an annual OCF of −$30,000. The fixed asset is fully depreciated over the life of the project and has no salvage value. If the required re..
Additional paid-in capital refers to:
Explain the difference between observed market prices and intrinsic (unobservable) prices. Explain what makes a market “fair” Define operational efficiency. Define informational efficiency (speed of info, accuracy of info, and accuracy of response to..
Assume that you are 21 years old. You would like to retire at age 65. You would like to have an income throughout retirement that is equivalent to $65,000 in todays dollars during retirement. You believe that you will earn an average return of 5% on ..
What is current price of ordinary common shares in Fortescue Metal Group(FMG)?Using an appropriate chart,describe how has this price evolved over the last 5-years,and compare to an appropriate index.
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