b.)Your firm’s capital structure is as follows: Debt: Book value = $260m Market
ID: 2761753 • Letter: B
Question
b.)Your firm’s capital structure is as follows:
Debt:
Book value = $260m
Market value = $300m
Coupon rate = 8%
Yield to Maturity = 6%
Preferred Stock
Book value = $75m
Market value = $75m
Required Rate of Return = 9%
Common Stock
Book value = $150m
Market value = $300m
Required Rate of Return = 12%
Assume that the corporate tax rate is 35%. What is your firm’s WACC?
8.07%
9.00%
7.89%
8.64%
7.19%
c.) You have an older piece of equipment that you think you can sell for $50,000. Its book value is currently $20,000. If the tax rate is 35%, your after-tax proceeds will be:
"41,250"
"39,500"
"32,500"
"13,000"
"17,500"
a.8.07%
b.9.00%
c.7.89%
d.8.64%
e.7.19%
Explanation / Answer
(b) Total Market Value=Market Value of Debt+Market Value of Preferred Stock+Market Value of Common Stock=300+75+300=675m
WACC=Sum of (Weight of of different types of capital*Cost of capital.)
In case of debt , tax shield has to be taken into account
WACC=0.06*(300/675)*(1-0.35)+0.09*(75/675)+0.12*(300/675)=0.080667 or 8.0667%
So the answer is 8.07%
(c) Tax =(Sales Price-Book Value)*(Tax Rate)=(50000-20000)*(0.35)=10500
So After Tax Proceeds=Sales Price-Tax=50000-10500=$39500
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