Robinson & Company Ltd. (RCL) has the following capital structure: 25% Debt and 75% common equity....
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Robinson & Company Ltd. (RCL) has the following capital structure: 25% Debt and 75% common equity. The after-tax cost of debt is 15% and the cost of common equity is 25%. i) Given that the tax rate is 25%, what is the weighted average cost of capital? (4 marks) ii) RCL is considering a project with an internal rate of return of 25%. Based on the WACC calculated in part (i) above, should they accept this project? Explain. (4 marks) iii) How would the cost of capital be impacted by a decision to increase the amount of common equity to 85% and reducing the amount of debt to 15%? Explain without calculations Robinson & Company Ltd. (RCL) has the following capital structure: 25% Debt and 75% common equity. The after-tax cost of debt is 15% and the cost of common equity is 25%. i) Given that the tax rate is 25%, what is the weighted average cost of capital? (4 marks) ii) RCL is considering a project with an internal rate of return of 25%. Based on the WACC calculated in part (i) above, should they accept this project? Explain. (4 marks) iii) How would the cost of capital be impacted by a decision to increase the amount of common equity to 85% and reducing the amount of debt to 15%? Explain without calculations
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i The weighted average cost of capital WACC is the weighted average of the cost of each component of ... View the full answer
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