What is weighted average cost of capital

Assignment Help Financial Management

Reference no: EM13934569

1. Martin Corporation is financed with 40% debt and 60% common equity. The after tax cost of debt is 10% and the cost of common equity is 14%. What is Martin’s weighted average cost of capital?

2. Martin is considering reducing it debt load and is contemplating a 20% debt and 80% common equity mix. If they do this, what should happen to the cost of debt (not the weighted cost – but the cost of each component)? The cost of equity (not the weighted cost)? Why?

3. Per the book, what risk increases with the additional use of debt by a corporation?

4. Assume that the restructuring is completed and Martin is now 20% debt and 80% common equity. The after tax cost of debt is 8% and the cost of common equity is 10%. What is Martin’s new weighted average cost of capital?

5. Should Martin make the capital structure change mentioned in the prior problem?

6. Instead, assume that the restructuring is completed and Martin is now 20% debt and 80% common equity. But the after tax cost of debt is 9% and the cost of common equity is 13.5%. What is Martin’s new weighted average cost of capital?

7. Now, should Martin make the capital structure change mentioned in the prior problem?

8. For a given profitable corporation (that pays taxes), what is the most expensive form of capital (between debt and common equity)? Why? Please state two reasons.

9. What is the difference between the weighted average cost of capital for a corporation and the marginal weight average cost of capital?

10. When weighting the components of capital to calculate the weighted average cost of capital, is it better to use book weights or market weights?

11. Why are accounts payable and accrued expenses not considered in the calculations of our weighted average cost of capital?

12. Leases are most like what source of funds?

13. Do most incremental cost of capital schedules slope upward or downward (when read left to right).

14. What is an optimal capital structure? 15. With regard to capital structure choice, what is the tax clientele effect?

16. What type of capital structure change could managers use today to signal their expectations of improved profitability in the future?

17. From chapter 18, if investors are assumed to be well informed, what opportunities are available to managers in choosing a capital structure?

18. From the book, in chapter 18, under what specific conditions is it more likely that information asymmetries would exist between managers and investors?

Reference no: EM13934569

Questions Cloud

Prepare a project work on web applications development : Prepare a Research/Project Work on Web applications development and E-business and e-learning in the developing economies of the Asia Pacific.

What type of lease shows up on balance sheet of corporation : What is a sale and lease back and why would a corporation do this? Why might a lease be easier to finance (or do) than a straight borrowing for the purchase of an asset? Explain two reasons. When should the cancellation provision be negotiated (befor..

How nigeria was able to defeat the ebola virus disease : The Topic is "How Nigeria Was able to Defeat and Contain The Ebola Virus Disease. Providing background on the science of the disease, how it is contacted etc. and How the govt was able to contain it- contact tracing etc. "

Write a paragraph elaborating on the justification : Write a paragraph elaborating on the justification provided by Suzette Barger.

What is weighted average cost of capital : Martin Corporation is financed with 40% debt and 60% common equity. The after tax cost of debt is 10% and the cost of common equity is 14%. What is Martin’s weighted average cost of capital? Instead, assume that the restructuring is completed and Mar..

You are a self-employed profit-maximization consultant : You are a self-employed profit-maximization consultant specializing in monopolies. Five single-price, profit-maximizing monopolies are currently seeking your advice, and although the information they have supplied to you is incomplete, your expert kn..

Alternative forms of pain management : Discuss five alternative forms of pain management (not pharmacologic) and explain how they would help with your patient's pain. Please include relevance of the treatment and how it works on the human body.

Why plato thinks sense-perception is not true knowledge : Explain in your own words why Plato thinks sense-perception is not true knowledge, what Plato thinks true knowledge consists of, and whether you agree with his position or not

What is the location of 14c in the product of ethanol : Where would 14C have to be located in the starting glucose to ensure that all the 14C activity is liberated as 14CO2 during fermentation to ethanol? Explain.

User Account

All Pages