Written Assignment

35 beta and market return are given by the

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: rage cost of capital as follow: After- tax WACC = 1 − T × D E × r! + × r! E+D E+D = 1 − 35% × 29.31% × 7.4% + 70.69% × 9.11% = 7 .8 5 % Answers to Q4: Since the company has altered its capital structure, the inherent risk of its equity change because the adjusted portion of debt, in- this case lower by debt portion becoming 25% and equity portion 75% as a result, making it less risky and therefore, we have to determine a new cost of equity through the following formula. D E Cost of new equity (r! (!"# !"#$%&) ) = r + r − r! × …whereas ‘r’ denotes WACC of the old financial weight Hence, we first have to re- determine the old WACC from Q3 on a pre- tax basis to decompose for actual risk of the existing cost of capital. Pre − tax WACC!"#$%" !"# !"#$%& !" !"#$%"& !"#$%"$#& (r) = D E × r! + × r! E+D E+D = 29.31% × 7.4% + 70.69% × 9.11% = 8.61% And with the new cost of debt of 7.2%; ∴ Cost of new equity (r! (!"# !"#$%&) ) = 8.61% + 8.61% − 7.2% × 25% = 9.08% 75% Page 3 Next, we can identify the company’s new post- tax weighted average cost of capital per the new capital structure by; After- tax WACC = 1 − T D E × r! + × r! = 1 − 35% 25% × 7.2% + 75% × 9.08% = 7 . 9 8% E+D E+D Page 4...
View Full Document

Ask a homework question - tutors are online