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Case:-

Assuming that ABC Firm has an optimal capital structure; comprised of debt, preferred stock and common equity. In this scenario, Firm currently has 45 percent debt, 2 percent preferred stock and 53 percent common equity in its capital structure. Firm’s before-tax cost of debt is 10 percent and corporate tax rate is 40 percent; beta for common stock is 0.85 with market return 14% and T-bills return 10%; whereas cost of preferred stock is 10.3 percent.

Required:

1. Keeping in view the above mentioned information what would be the values of the firm’s:
§ After tax cost of debt ‘Kd(1 – T)’
§ Weighted average cost of capital ‘WACC’
Note: Detailed working is not required.

2. You need to stimulate your thought and discuss the impact (increase/ decrease) on firm’s cost of equity ‘Ks’ and weighted average cost of capital ‘WACC’ if volatility of ABC Firm’s stock is increased up to 1.8. Give logical justification of your answer.

Note: Your discussion should not exceed 50 words.




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Replies to This Discussion

Please Discuss here about this GDB.Thanks

After Tax cost of Debt = .10 (1-.40) = 6%

WACC = 0.45(0.10)(.6) + 0.02(0.103) + 0.53(0.134) = 10.008

Cost of equity and WACC both will increase because of increase in volatility of share price in market.

Tariq bhai plz chek this also.

Calculatio after tax cost of debt

rD = rD* (1 - TC)
= 0.14 (1- 0.40)
=0.084 or

=84%

WACC

=rD xD + rE xE + rP xP

=14% (45%) + 10% (53%) + 10.3% (2%)
=0.14(0.45) +0.10(0.53) +0.103(0.02)

=0.063 + 0.053 + 0.00206
=0.11806 0r

=11.806%

 

Cost of equity and WACC both will increase because of increase in volatility of share price in market.

In dono m kon c solution thek ha plz any one tell me.

yaar theak wala konsa hai or confusion create ker d hai.

after tax cost of debt ka answer ko WACC main use karna hy page # 125 par hy....bt yeh clear ny ho raha k wacc mn rDxD mn 3 values kasy aa gy......

tariq bahi kon sa theak ha in dono ma sa

abid hussain  gud keep it up 

After Tax cost of Debt = .10 (1-.40) = 6%

WACC = 0.45(0.10)(.6) + 0.02(0.103) + 0.53(0.134) = 10.008

Cost of equity and WACC both will increase because of increase in volatility of share price in market.

thanks

This cost of equity was calculated by the formula 

Rf + (Rm - Rf) B

plzzz tell the right one plzzz hurry pllzzzzz

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