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Omega Corporation has 11.7 million shares outstanding, now trading at $48 per share. The firm has...

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Finance

Omega Corporation has 11.7 million shares outstanding, nowtrading at $48 per share. The firm has estimated the expected rateof return to shareholders at about 10%. It has also issued $165million of long-term bonds at an interest rate of 9%. It pays taxat a marginal rate of 34%.

a. What is Omega’s after-tax WACC? (Do not round intermediatecalculations. Enter your answer as a percent rounded to 2 decimalplaces.) After-tax WACC = _______%

b. What would WACC be if Omega used no debt at all? (Hint: Forthis problem you can assume that the firm’s overall beta [?A] isnot affected by its capital structure or by the taxes saved becausedebt interest is tax-deductible.) (Do not round intermediatecalculations. Enter your answer as a percent rounded to 2 decimalplaces.) WACC = ________%

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4.2 Ratings (783 Votes)
Solution a After tax WACC 908 Working Notes For After tax WACC Returns required for investor of debt only needed tax adjustment common stock required rate of return are already after tax so it does not required further adjustment The cost of debt is 9 the interest rate After tax cost of debt Kd Cost of debt x 1 tax rate After tax cost of debt Kd 9 x 1 034 After tax cost of debt Kd 9 x    See Answer
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