Omega Corporation has 11.6 million shares outstanding, now trading at $49 per sh

Question

Omega Corporation has 11.6 million shares outstanding, now trading at $49 per share. The firm has estimated the expected rate of return to shareholders at about 11%. It has also issued long-term bonds at an interest rate of 8%. It pays tax at a marginal rate of 35%. Assume a $170 million debt issuance.

What is Omegas after-tax WACC? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

How much higher would WACC be if Omega used no debt at all? (Hint: For this problem you can assume that the firms overall beta [?A] is not affected by its capital structure or by the taxes saved because debt interest is tax-deductible.) (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Omega Corporation has 11.6 million shares outstanding, now trading at $49 per share. The firm has estimated the expected rate of return to shareholders at about 11%. It has also issued long-term bonds at an interest rate of 8%. It pays tax at a marginal rate of 35%. Assume a $170 million debt issuance.

Explanation / Answer

Stock Number Price Market Value Weight Return Weighted return Common Stock               11,600,000.00                     49.00         568,400,000.00                          0.7698 11.00% 8.47% Bond or debt         170,000,000.00                          0.2302 5.20% 1.20%         738,400,000.00                          1.0000 9.66% return on debt = 8% (1-.35) return on debt = 5.20% Omega After Tax WACC is 9.66% If there is no debt then Omega WACC will be return on equity i.e.11%

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