Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. finance
  3. abc food, inc., has a weighted average cost of cap

ABC Food, Inc., has a weighted average cost of capital of 10.2 percent. The companys...

70.2K

Verified Solution

Question

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.

  1. What is the companys target debtequity ratio?

(15 marks)

  1. 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.

  1. 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)

Answer & Explanation Solved by verified expert
Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:
  • Unlimited Question Access with detailed Answers
  • Zin AI - 3 Million Words
  • 10 Dall-E 3 Images
  • 20 Plot Generations
  • Conversation with Dialogue Memory
  • No Ads, Ever!
  • Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
Become a Member

Other questions asked by students