Question 12
(CHAPTER 14)
A company faces a 40% corporate income tax rate. It has debt and equity in its capital
structure, with the following characteristics:
Equity
Debt
15,000 shares
1,000 bonds
$70 current price per share
$920 current bond value
9% cost of equity
5% pre-tax cost of debt
Calculate the following. (Percent, not decimals! Increase decimal places for any intermediate
calculations, from the default 2 to 6 or higher. Only round your final answer to TWO decimal
places: for example, 12.34.)
The weight of equity is
%.
The weight of debt is
%.
5
Name
The company is evaluating a new investment project that has the SAME RISK as its typical
projects. The rate it should use to discount the project's expected future cash flows is the
company's WACC equal to
%.
If, instead, the company is evaluating a new investment project that has a LOWER RISK than
its typical projects, it should use a discount rate that is:
(a) higher than the company's WACC
(b) the same as the company's WACC
(c) lower than the company's WACC
Your answer: