Solution-What would happen to the weighted average cost of

What would happen to the weighted average cost of capital

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Question - Pedro's Plumbing has a number of retail outlets in the Ottawa area. The company's capital structure consists of $40,000,000 of long-term debt, which carries an interest rate of 8% (the tax rate is 25%), and $60,000,000 of equity, on which the shareholders expect a return of 20%.

Required -

(a) Calculate the weighted average cost of capital.

(b) If the company used $40,000,000 of surplus cash to repay the debt, what would happen to the weighted average cost of capital?

(c) If the company borrowed an additional $40,000,000 and used it to pay the shareholders a $40,000,000 dividend, what would happen to the weighted average cost of capital?

Reference no: EM133051005

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What would happen to the weighted average cost of capital

Reference no: EM133051005

Reference no: EM133051005

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