Ronan Corporation is based in Dallas. Approximately 45% of its sales are from exports to...
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Ronan Corporation is based in Dallas. Approximately 45% of its sales are from exports to Canada, and the company has no other international business. It finances its operations with 35% dollar-denominated debt and 65% equity. Ronan Corporation borrows its funds from a U.S. bank at an interest rate of 7.5 percent per year. The long-term risk-free rate in the U.S. is 4 percent, whereas the long-term risk-free rate in Canada is 5.5% percent. The stock market return in the U.S. is expected to be 10 percent annually. Ronan uses a Beta of 0.85 for its stock. Its earnings are subject to a 32% corporate tax rate.
a. What is the cost of capital for the Rhatigan Corporation?
b. Suppose that the corporate tax rate rises to 40%. In response, the Rhatigan Corporation changes its capital structure to 40% debt and 60% equity. Assuming nothing else changes, what is the new cost of capital for the Rhatigan Corporation after these changes?
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