ABC Food, Inc., has a weighted average cost of capital of 10.2 percent. The companys...
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Finance
ABC Food, Inc., has a weighted average cost of capital of 10.2 percent. The companys cost of equity is 15 percent, and its pre-tax cost of debt is 6.9 percent. The tax rate is 35 percent.
What is the companys target debtequity ratio?
(15 marks)
Why do we use an after-tax figure for cost of debt but not for cost of equity?
(3 marks)
PCW, Inc., is all-equity-financed. The expected rate of return on the companys shares is 20 percent.
What is the opportunity cost of capital for an average-risk PCW investment? (5 marks)
Suppose the company issues debt, repurchases shares, and moves to a 50 percent debt-to-value ratio (D/V = .50). What will be the companys weighted-average cost of capital at the new capital structure? The borrowing rate is 5 percent and the tax rate is 35 percent. (D+E=V)
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