A fellow analyst in the finance department has asked you for help. The CFO is trying...

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A fellow analyst in the finance department has asked you for help. The CFO is trying to complete the following calculations to use for several upcoming capital budgeting decisions. Your company. ABC Inc. has two divisions which are equal in value (size) and the target capital structures of the two divisions and company are shown below. Assume that the riskiness of ABC's debt is constant over small changes in capital structure and the beta of debt is 0.5. Over the past year ABC Inc has had $10 million in debt and 1 million shares outstanding which has traded at an average price of $8 per share. The risk free rate is 3%, the expected return on the market is 12% and the marginal tax rate is 34%. Target %Equity Target %Debt Distribution 80% 20% Manufacturing 20% 80% ? WACC Re Rd Be* * The beta is computed using equity returns over the last 250 trading days. RBN Inc. 50% 50% 2 0.18 0.08 0.075 1.5 a.) What is the WACC adjusted for taxes for the Manufacturing division? b.) What is the return on debt (Rd) for the Distribution division? c.) Your colleague knows how to compute ABC's WACC but is having problems figuring out what the return on equity would be for that calculation. What is that return on equity for ABC Inc (Re)? A fellow analyst in the finance department has asked you for help. The CFO is trying to complete the following calculations to use for several upcoming capital budgeting decisions. Your company. ABC Inc. has two divisions which are equal in value (size) and the target capital structures of the two divisions and company are shown below. Assume that the riskiness of ABC's debt is constant over small changes in capital structure and the beta of debt is 0.5. Over the past year ABC Inc has had $10 million in debt and 1 million shares outstanding which has traded at an average price of $8 per share. The risk free rate is 3%, the expected return on the market is 12% and the marginal tax rate is 34%. Target %Equity Target %Debt Distribution 80% 20% Manufacturing 20% 80% ? WACC Re Rd Be* * The beta is computed using equity returns over the last 250 trading days. RBN Inc. 50% 50% 2 0.18 0.08 0.075 1.5 a.) What is the WACC adjusted for taxes for the Manufacturing division? b.) What is the return on debt (Rd) for the Distribution division? c.) Your colleague knows how to compute ABC's WACC but is having problems figuring out what the return on equity would be for that calculation. What is that return on equity for ABC Inc (Re)?

Answer rating: 100% (QA)

To calculate the required values well use the following formulas a WACC adjusted for taxes WACC EV R... View the full answer