13. a) Luna Corporation has a beta of 1.5, 10 billion in equity, and 5 billion...

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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)

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