Unit7.CorporateFinance

# Unit7.CorporateFinance - 10.01 b How much higher would WACC...

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If you want the formulas and any calculations, select the corresponding cell and press F2(Func It will show all calculations and formulas Automatically Question: Omega Corporation has 10 million shares outstanding, now trading at \$55 per share. The firm has estimated the expected rate of return to shareholders at about 12 percent. It has also issued long-term bonds at an interest rate of 7 percent. It pays tax at a marginal rate of 35 percent. a. What is Omega’s after-tax WACC? Solution: Computation of the Weighted Average Cost of Capital Given information Market value Cost of capital Common Stock \$550,000,000 0.12 Debt \$200,000,000 0.07 Note: in the given Prob If this figure is not corre Computation of the WACC Stocks Market Value Cost of capital Weights Tax Common Stock \$550,000,000 12.00% 73.33% 0 Debt \$200,000,000 7.00% 26.67% 35% Total \$750,000,000 Hence the WACC is

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Unformatted text preview: 10.01% b. How much higher would WACC be if Omega used no debt at all? Hint: For this problem you can assume that the firm’s overall beta ( A) is not affected by its capital structure or the taxes saved because debt interest is tax-deductible. Solution: If the Firm not using the Debt than the WACC would be increase up to the loss of tax deductibility of th So WACC with out Tax Computation of the WACC Stocks Market Value Cost of capital Weights Tax Common Stock \$550,000,000 12.00% 73.33% Debt \$200,000,000 7.00% 26.67% 0% Total \$750,000,000 Hence the WACC is 10.67% ction Key on key board), blem Debt Amount is not given so we assumed that 200,000,000 ect so please change in amount of debt every thing will change automatically WACC 8.80% 1.21% 10.01% he interest on Debt WACC 8.80% 1.87% 10.67%...
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## This note was uploaded on 07/06/2011 for the course MM 305 taught by Professor Fulton during the Fall '09 term at Kaplan University.

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Unit7.CorporateFinance - 10.01 b How much higher would WACC...

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