Reconsider the results you obtained for the Allister Company in Problem 4. Assume that Allister's uses the WACC for MARR.

a. For each case (a through e), use the estimation equation given in Equation 5.1 and your result for after-tax WACC to calculate an estimate of before-tax WACC.

b. What conclusions can you draw from your calculations about the accuracy of the estimations as the split between debt and equity changes?

c. Would your answer to (b) have been different if you had used Equation 5.1 to estimate after-tax WACC based on before-tax WACC for each case?

Data from problem 4

Allister Company uses both debt capital and equity capital to fund new projects. The before-tax cost of debt capital is 12 percent. The cost of equity capital is 10 percent. Allister's effective tax rate is 40 percent. For each of the following cases, calculate the before-tax weighted average cost of capital and the after-tax weighted average cost of capital. The percentage ratio of debt funding to equity funding is

a. \(0 / 100\).

b. \(25 / 75\).

c. \(50 / 50\).

d. \(75 / 25\).

e. \(100 / 0\).

Transcribed Image Text:

MARRBT MARRAT /(1 -itr) (5.1)