Barbow Enterprises, Inc., is considering an expansion in their operations. One o
ID: 2707719 • Letter: B
Question
Barbow Enterprises, Inc., is considering an expansion in their operations. One of the first items they want to examine is their cost of capital. According to the accounting department, the following items and their respective costs have been identified:
They have also calculated the marginal tax rate to be 40% and the stock sells at its book value.
Balance Sheet
Assets
Liabilities and Owners' Equity
Cash
Long Term Debt
Accounts Receivable
Equity
Inventories
Net P&E
Total Assets
Total Liabilities and owners' Equity
Required:
Calculate Barbow
Barbow Enterprises Inc.Balance Sheet
Assets
Liabilities and Owners' Equity
Cash
$240
Long Term Debt
$2,304
Accounts Receivable
480
Equity
3,456
Inventories
720
Net P&E
4,320
Total Assets
$5,760
Total Liabilities and owners' Equity
$5,760
Explanation / Answer
after-tax weighted average cost of capital = After Tax cost of debt x debt portion + cost of equity x equity portion
= 12% (1- 0.4) x2304/5760 + 15% x 3456 / 5760
= 7.2 (0.4) + 15(0.6) = 2.88 + 9 = 11.88%
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