Homework answers / question archive / Assume a tax-paying firm is currently financed with 50% debt and 50% equity

Assume a tax-paying firm is currently financed with 50% debt and 50% equity

Finance

Share With

1. Assume a tax-paying firm is currently financed with 50% debt and 50% equity. The after-tax cost of debt is 6% and the cost of equity is 12%. If the firm issues some 8% preferred stock at par, then the firm's WACC will:
2. Assume a firm's debt is selling at face value. What is the firm's cost of debt if the debt has a coupon rate of 7.5% and the tax rate is 35%?
3. What proportion of a firm is equity financed if the WACC is 14%, the after-tax cost of debt is 7%, the tax rate is 35%, and the required return on equity is 18%?
4. A firm sells a product that it realizes is short-lived and thus the firm plans to close after 2 more years. The firm expects to have free cash flows of $398,000 next year and $211,000 in Year 2 after incurring the costs of closing. The firm's cost of equity is 14% and its cost of debt is 5.5%. What is the present value of the firm if its debt to value ratio is 40%?
5. Al's Market plans to close after 3 more years. The firm expects to have free cash flows of $148,000 next year, $128,000 in Year 2, and $65,000 in Year 3 after incurring the costs of closing. The firm's cost of equity is 15.5% and its cost of debt is 6.2%. What is the present value of the firm if its debt to value ratio is 30%?
6. A proposed project has a positive NPV when evaluated at the company cost of capital. If the firm employs debt in its capital structure, will the project remain acceptable after evaluation with the WACC?
7. What is the after-tax cost of preferred stock that pays a 12% dividend and sells at par if the firm's tax rate is 35%?
8. What is the WACC for a firm with 40% debt, 20% preferred stock, and 40% equity if the respective costs for these components are 6% after tax, 12% after tax, and 18% before tax? The firm's tax rate is 35%.
9. What is the WACC for a firm with 40% debt, 20% preferred stock, and 40% equity if the respective costs for these components are 9.23% before tax, 12% after tax, and 18% before tax? The firm's tax rate is 35%.
10. A project will generate a $1 million net cash flow annually in perpetuity. If the project costs $7 million, what is the break-even WACC?