13. a) Luna Corporation has a beta of 1.5, 10 billion in equity, and 5 billion...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
13. a) Luna Corporation has a beta of 1.5, £10 billion in equity, and £5 billion in debt with an interest rate of 4%. Assume a risk-free rate of 0.5% and a market risk premium of 6%. Calculate the WACC without tax. (30 marks) b) Queen Corporation has a debt-to-equity ratio of 1.8. If it had no debt, its cost of equity would be 16%. Its current cost of debt is 10%. What is the cost of equity for the firm if the corporate tax rate is 35%? (20 marks) c) Discuss the impact of corporate taxes on the optimal capital structure of the firm in an otherwise perfect capital market. (50 marks) 13. a) Luna Corporation has a beta of 1.5, £10 billion in equity, and £5 billion in debt with an interest rate of 4%. Assume a risk-free rate of 0.5% and a market risk premium of 6%. Calculate the WACC without tax. (30 marks) b) Queen Corporation has a debt-to-equity ratio of 1.8. If it had no debt, its cost of equity would be 16%. Its current cost of debt is 10%. What is the cost of equity for the firm if the corporate tax rate is 35%? (20 marks) c) Discuss the impact of corporate taxes on the optimal capital structure of the firm in an otherwise perfect capital market. (50 marks)
Expert Answer:
Answer rating: 100% (QA)
a To calculate the Weighted Average Cost of Capital WACC without tax for Luna Corporation we can use the following formula WACC E V Re D V Rd Where E ... View the full answer
Related Book For
Corporate Finance A Focused Approach
ISBN: 978-1305637108
6th edition
Authors: Michael C. Ehrhardt, Eugene F. Brigham
Posted Date:
Students also viewed these banking questions
-
You are provided with the following information for Guillaume Inc. for the month ended June 30, 2012. Guillaume uses the periodic method for inventory. Instructions(a) Calculate (i) ending inventory...
-
The following table shows the U.S. market share for smartphone manufacturers in 2013 according to the research firm comScore. The table also shows the frequency of purchases of smart phones by brand...
-
The following table shows the masses, m grams, of 100 unsealed bags of plain potato crisps. a. Show that the heights of the columns in a histogram illustrating these data must be in the ratio 2 : 3 :...
-
Tri-State Railroad Company organizes its three divisions, the Southeast (SE), East (E), and South (S) regions, as profit centers. The chief executive officer (CEO) evaluates divisional performance,...
-
On January 1, 2014, Sherwood Company, an 80% owned subsidiary of Paradise Company, sold to Paradise Company equipment with a book value of $600,000 for $840,000. The equipment had an estimated...
-
Write each expression in the standard form a + bi. 2 + i i
-
Based on the following pedigree for a trait determined by a single gene (affected individuals are shown as filled symbols), state whether it would be possible for the trait to be inherited in each of...
-
The following payroll liability accounts are included in the ledger of Wimble Company on January 1, 2012. FICA Taxes Payable............ $ 760.00 Federal Income Taxes Payable........ 1,204.60 State...
-
Without using row reduction, apply block operation on A to compute its inverse. [1 2000 3 50 00 A=0 0 2 00 0007 8 0 0056
-
Benefits Retirement plan Health Insurance Life Insurance Disability Insurance Benefit spent Amount R 800,000 R 75,000 1.2 R 350,000 R 250,000 R 1, 475,000 Direct remuneration Basic pay Differential...
-
Compile a preliminary list ofthe selected agricultural project of a hydroponic vegetable farming endeavour designed to provide local markets in a particular neighbourhood with fresh and organic...
-
To draw Lewis symbols for atoms and ions and to balance Lewis structures for ionic compounds. The Lewis symbol for an atom or ion shows the valence electrons as dots around the symbol for the...
-
What real-world examples exist for applying lean, agile, kanban, and scrum methodologies in industries outside of construction? How have these methodologies contributed to improving project agility...
-
Centennial College has determined it is in need of a new course, PMGT 730: Project Management Fundamentals (Online). A fundamentals course is critical for a variety of reasons, including building a...
-
For this assignment we only represent Creative Catering. You will be using the example motion to dismiss (Timkin), and the example draft pleading posted for last week's class for this assignment....
-
A retail store has an annual demand for 30,000 units of one of its products ordered from a wholesaler at a unit cost of $25. The cost of ordering has been estimated to be $10 per order. The company...
-
B made an issue of 150,000 $1 ordinary shares at a premium of 20% the proceeds of which is received by cheque. What is the correct journal to record this? A. Bank Share capital Share premium B. Bank...
-
What are the nominal and effective costs of trade credit under the credit terms of 3 15, net 30? Discuss.
-
Counts Accounting's beta is 1.15 and its tax rate is 40%. If it is financed with 20% debt, what is its unlevered beta? Discuss.
-
Explain how to use the free cash flow valuation model to find the price per share of common equity.
-
The following are summaries of the cash book and bank accounts of J. Duncan who does not keep his books using the double entry system. You are required to: (a) Calculate the value of J. Duncan's...
-
Read the following and answer the questions below. On 31 December 2015 the bank column of C. Tench's cash book showed a debit balance of 1,500. The monthly bank statement written up to 31 December...
-
The bank columns in the cash book for June 2016 and the bank statement for that month for D. Hogan are as follows: You are required to: () Write the cash book up to date to take the above into...
Study smarter with the SolutionInn App