What do you think about this?
A. After-tax cost of debt capital = (Pre-tax cost)(1 - Corporate tax rate) = (25 million x 9.5%)(1-35%) = $1,543,750
B. Earnings after interest pmts, before tax pmts = Earnings before intetrest - (Par value of debt)(Coupon rate) = 18 million - (25 million)(9.5%) = $15,625,000
C. After-tax earnings avail. to shareholders = Earnings after interest x (1 - tax rate) = 15,625,000 - (1-35%) = $10,156,250
D. Market value of equity = # shares x Market price per share = 2 million x $40 = $80 million
E. Return on market value equity (re) = After-tax earnings to shareholders / Market value of equity = 10,156,250 / 80,000,000 = 12.6953%
F. Return on assets using WACC method = [(After-tax cost of debt) x (MV debt) + (Cost of equity) x (MV equity)] / [MV debt + MV equity] = [(1,543,750/25,000,000) x 25,000,000 + 12.6953% x 80,000,000] / [25,000,000 + 80,000,000] = 11.1429%
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