Company ABC borrows at an annual interest rate of 10%. It faces an income tax rate of
Question:
Company ABC borrows at an annual interest rate of 10%. It faces
an income tax rate of 40%. What is Company ABC's after-tax cost of debt?
2.1.b (5 marks) Company ABC's cost of equity is 15%. Suppose Company ABC has a debt-to-equity ratio of 0.8. What is Company ABC's after-tax WACC?
2.1.c (5 marks) If Company ABC decides to borrow more debts to buy back its shares, the value of Company ABC will A. Increase. B. Decrease.
C. Remain constant. D. cannot be sure with the given information.
2.1.d (5 marks) With perfect capital market, assuming zero bankruptcy costs, what is the optimal level of debt-to-equity ratio to a company facing a 40% income tax rate? A. 0%.
B. 20%. C. 50%. D. 100%. E. cannot be sure with the given information.
Financial and Managerial Accounting the basis for business decisions
ISBN: 978-1259692406
18th edition
Authors: Jan Williams, Susan Haka, Mark Bettner, Joseph Carcello