Evans Technology has the following capital structure. Debt 40 % Common equity 60 The aftertax cost...
Evans Technology has the following capital structure.
| Debt | 40 | % |
| Common equity | 60 | |
The aftertax cost of debt is 7.00 percent, and the cost of common
equity (in the form of retained earnings) is 14.00 percent.
a. What is the firm’s weighted average cost of
capital? (Do not round intermediate calculations. Input
your answers as a percent rounded to 2 decimal
places.)
An outside consultant has suggested that because debt is cheaper
than equity, the firm should switch to a capital structure that is
50 percent debt and 50 percent equity.
Under this new and more debt-oriented arrangement, the aftertax
cost of debt is 8.00 percent, and the cost of common equity (in the
form of retained earnings) is 16.00 percent.
b. Recalculate the firm's weighted average cost of
capital. (Do not round intermediate calculations. Input
your answers as a percent rounded to 2 decimal
places.)
c. Which plan is optimal in terms of minimizing
the weighted average cost of capital?
| Plan A | |
| Plan B |
Homework Answers
a. What is the firm’s weighted average cost of capital? (Do not
round intermediate calculations. Input your answers as a percent
rounded to 2 decimal places.)
=40%*7%+60%*14%=11.2000%
b. Recalculate the firm's weighted average cost of capital. (Do
not round intermediate calculations. Input your answers as a
percent rounded to 2 decimal places.)
=50%*8%+50%*16%=12%
c. Which plan is optimal in terms of minimizing the weighted average cost of capital?
Plan A
Add Answer to:
Evans Technology has the following capital structure.
Debt
40
%
Common equity
60
The aftertax cost...
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Evans Technology has the following capital structure. Debt Common equity The aftertax cost of debt is 9.00 percent, and the cost of common equity in the form of retained earnings) is 16.00 percent. a. What is the firm's weighted average cost of capital? (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) Weighted Cost Debt Common equity Weighted average cost of capital 0.001% An outside consultant has suggested that because debt is cheaper...
Evans Technology has the following capital structure. Debt 35 % Common equity 65 The aftertax cost...
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