W4A4
Scenario: Company ABC wants to invest in a Swedish manufacturing company that has an optimal debt ratio of 60%. Company ABC's cost of equity capital is 16% and its before-tax borrowing rate is 12.3%. As the CFO of ABC, you have to justify the profitability of this investment.
Your Task: Given a marginal tax rate of 45%, calculate:
The weighted average cost of capital (WACC)
The cost of equity for an equivalent all-equity financed firm
Grading Criteria
Maximum Points
Accurately calculated the weighted average cost of capital (WACC).
25
Accurately calculated the cost of equity for an equivalent all-equity financed firm.
25
Presented a structured document free of spelling and grammatical errors.
5
Properly cited sources using APA format.
5
Scenario: Company ABC wants to invest in a Swedish manufacturing company that has an optimal debt ratio of 60%. Company ABC's cost of equity capital is 16% and its before-tax borrowing rate is 12.3%. As the CFO of ABC, you have to justify the profitability of this investment.
Your Task: Given a marginal tax rate of 45%, calculate:
The weighted average cost of capital (WACC)
The cost of equity for an equivalent all-equity financed firm