Find out weighted average cost of capital, Financial Management

Assignment Help:

The Beta Corporation has an optimal debt ratio of 40%. Its cost of equity capital is 12% and its before-tax borrowing rate is 8%.  Given a marginal tax rate of 35%, calculate

(1) The weighted-average cost of capital and,

(2) The cost of equity for an equivalent all-equity financed firm.

Solution: 

(1) K = (1 - .40).12 + (.40).08(1 - .35)      

      = .0928 or 9.28% 

(2) A weighted-average cost of capital of 9.28% for a levered firm implies:       

K =.0928 = Ku (1-(.35)(.40)).  Solving for Ku yields .1079 or 10.79%.


Related Discussions:- Find out weighted average cost of capital

Cash management - managing excess cash, Cash management is about managing ...

Cash management is about managing excess cash also. The response of management must depend on whether the surplus is large and how long it is likely to exist. If the balance is

Push strategy, Push Strategy This is referred for marketing approa...

Push Strategy This is referred for marketing approach in which a manufacturer uses its sales force and trade promotions to sell a product actively to retailers and wholesa

zero salvage value, Big Joe's is changing a piece of equipment.  The equip...

Big Joe's is changing a piece of equipment.  The equipment will cost $5,000 and has a 5 year life.  The equipment can be leased for annual payment of $1,295 paid at the starting of

Increase total revenue, The Australian skiing industry operates out of a ve...

The Australian skiing industry operates out of a very narrow seasonal base-approximately three months in a good season. In a good year, providers of accommodation, ski hire and tow

Explain the terminologies of finance, Explain the terminologies of finance ...

Explain the terminologies of finance Raise and efficiently utilise funds which are your disposal (or at least try to).That a business organisation also needs to do the same can

Walter''s Model, Explain the effect of different dividend policies on the v...

Explain the effect of different dividend policies on the value of share respectively as per the walter model in Case 1: Dividend payout ratio is 50% Case 2: Dividend payout ratio

Discuss the process of maximise profits, Discuss the process of  Maximise ...

Discuss the process of  Maximise Profits Let's first look at profit maximisation.  Profit (also known as net income or earnings) canbe defined as the amount a business earns af

Evaluate the vulnerability, Assume you are a professional financial analyst...

Assume you are a professional financial analyst working for a wealthy investor.  Your client has $2.6 million to invest and wants to sink it into a single stock (diversification is

Yield to worst, Now we can calculate the yield for each possible call...

Now we can calculate the yield for each possible call or put date. In addition, we can also calculate the yield to maturity. The lowest yield of all these possibl

Financial and strategic analysis, Evaluate the firm’s financial standing fo...

Evaluate the firm’s financial standing for the past 5 years: • Undertake a financial and strategic analysis of its performance: o Use the Assignment Questions for guidance ON

Write Your Message!

Captcha
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