1. Suppose that JB Cos. has a capital structure of 75 percent equity, 25 percent
ID: 2654223 • Letter: 1
Question
1.
Suppose that JB Cos. has a capital structure of 75 percent equity, 25 percent debt, and that its before-tax cost of debt is 13 percent while its cost of equity is 17 percent. Assume the appropriate weighted-average tax rate is 25 percent.
What will be JB’s WACC? (Round your answer to 2 decimal places.)
WACC %
2.
Suppose that B2B, Inc., has a capital structure of 36 percent equity, 16 percent preferred stock, and 48 percent debt. Assume the before-tax component costs of equity, preferred stock, and debt are 14.0 percent, 10.0 percent, and 9.0 percent, respectively.
What is B2B’s WACC if the firm faces an average tax rate of 30 percent? (Round your answer to 2 decimal places.)
WACC %
3.
ILK has preferred stock selling for 96 percent of par that pays a 8 percent annual coupon.
What would be ILK’s component cost of preferred stock? (Round your answer to 2 decimal places.)
Cost of preferred stock %
Explanation / Answer
1.
Weighted average cost of capital (WACC) would be calculated as below:
Source
Proportion (a)
Before-tax cost of capital (%)
After-tax cost of capital (b)
WACC [a×b]
Equity
0.75
17
17
12.75%
Debt
0.25
13
[13(1-0.25)=] 9.75
2.44%
Total
1.00
15.19%
Answer: WACC is 15.19%
Source
Proportion (a)
Before-tax cost of capital (%)
After-tax cost of capital (b)
WACC [a×b]
Equity
0.75
17
17
12.75%
Debt
0.25
13
[13(1-0.25)=] 9.75
2.44%
Total
1.00
15.19%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.