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nIf managers are investing shareholders' funds, shareholders will expect to earn their required rate of return

nFor internal equity, the required rates of return are equivalent to the cost as no issue costs are involved

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What is the after-tax cost of capital formula and how can it be calculated effectively?

The after-tax cost of capital formula is: After-tax Cost of Capital (Cost of Debt x (1 - Tax Rate) x (Debt / Total Capital)) (Cost of Equity x (Equity / Total Capital)) To calculate it effectively, you need to determine the cost of debt and cost of equity, as well as the proportion of debt and equity in the company's capital structure. Multiply the cost of debt by (1 - Tax Rate) to account for the tax shield on interest payments. Then, multiply each component by its respective proportion in the capital structure and sum them up to get the after-tax cost of capital.


What is the weighted average cost of capital (WACC) after tax for the company?

The weighted average cost of capital (WACC) after tax is the average rate a company pays to finance its operations, taking into account the proportion of debt and equity used. It is calculated by multiplying the cost of debt by the proportion of debt in the capital structure, adding the cost of equity multiplied by the proportion of equity, and adjusting for taxes.


What happens when the cost of capital increases?

The market value of a firm's equity increases, the cost of capital decreases.


How can one determine the Weighted Average Cost of Capital (WACC) for a company"?

To determine the Weighted Average Cost of Capital (WACC) for a company, you need to calculate the weighted average of the cost of debt and the cost of equity. This involves multiplying the proportion of debt and equity in the company's capital structure by their respective costs, and then adding them together. The formula is: WACC (E/V) x Re (D/V) x Rd x (1 - Tc), where E is equity, V is total value of the company, Re is cost of equity, D is debt, Rd is cost of debt, and Tc is the corporate tax rate.


Why does the weighted average cost of capital of firms that uses more debt capital lower that that of a firm that uses less debt capital?

Because the cost of debt is generally lower than the cost of equity. This is because in case of financial distress, debt-holders are repaid before the equity holders are, as well as because debt has the assets of the firm as collateral and equity does not.

Related Questions

Internal failure cost?

Internal failure cost are quality costs that are associated with defects that have been discovered before delivery to customers. This internal failure cost is detected through inspection and appraisal activities.


What is the Difference between External Failure Costs and internal failure costs?

External failure cost is the cost incurred to fix the defects given by customer. Internal failure cost is the cost associated with internal verification activities like fixing the review comments or fixing the internal testing bugs.


What is the formula for external equity?

The cost of internal equity (using the dividend discount model) iske = (D1/P0) + gThe cost of external What_is_the_formula_for_external_equityis just like the formula for internal equity (retained earnings) except that you base it on the net proceeds after flotation costs rather than the market value of the stock.ke' = (D1/Pnet) + gBecause Pnet will be somewhat lower than P0 (because of the flotation costs), ke' will be higher than ke.


Is pretax cost of equity higher or lower than after tax cost of equity?

they are equal


What is the forula for valuation from income basis?

Equity Charge = Equity Capital x Cost of Equity is the formula.


The cost of external equity is greater than the cost of retained earnings because a. floatation costs on new equity b. capital gains tax on new equity c. interest expense d. risk premium?

The cost of external equity is higher because the floatation costs on new equity.


Deferance between Cost of equity and cost of capital?

cost of equity denotes by "Ke" and cost of capital denotes by "Ko". Cost of Equity:- it is the expectation an investor has from his investment. it is actually the desire of investor. Cost of Debt:- it is the cost for the debt which we have raise for business . It is calculated at after tax cost as like interest is allowable in income tax.


How do you solve this finance problem on WACC?

Cablevision Inc. has bonds with a coupon rate of 12% (assume annual payments) , and a maturity of 30 years. These bonds today are selling for $1392.73. Additionally, the firm's beta is 1.2, the risk-free rate is 5 percent, and the expected market return is 13%. The firm has $300M of debt and $550M of Equity on its balance sheet. The firm's stock price is $20/share, its current dividends are $1.50 per share, and these dividends are expected to grow at 7% per year. The book value of equity is $10/share. The firm's tax rate is 40%. The flotation costs of bonds are 4%, and for stock issues it is 8%. The firm plans on satisfying 75% its equity needs internally and 25% of it externally.a. Find the firm's cost of debt.b. Find the firm's cost of internal equity using the CAPM.c. Find the firm's cost of internal equity using the dividend growth modeld. Find the firm's cost of external equity using the dividend growth modele. Find the firm's cost of external equity using CAPMf. Find the firm's WACC using the dividend growth model for the firm's costs of internal and external equity.g. Find the firm's weighted average cost of capital (WACC) using CAPM in calculating the firm's costs of internal and external equity.h. Under what assumptions would it be appropriate for the firm to use its WACC as the discount rate in evaluating its projects?


How do you calculate cost of equity when you only know total equity and PE ratio?

can't


Cost and benefits of debt financing and equity financing?

benefit of debt and equity financing


If you have the debt assets after taxes percent of 10 percent cost of debt 8 percent and cost of equity 12 percent how is cost of capital calcuated?

WACC = Cost of Debt * Weight of Debt = + Cost of equity * Weight of Equity WAAC = .08*.10 + .12*.90 WAAC = 10.88%


What is the difference between the cost of capital and the cost of equity, and how do they impact a company's financial decisions?

The cost of capital is the overall cost of financing a company's operations, including both debt and equity. The cost of equity specifically refers to the return required by investors who have provided equity financing. The cost of capital influences a company's investment decisions, as it represents the minimum return the company must earn on its investments to satisfy its investors. The cost of equity, on the other hand, affects the company's ability to attract investors and raise funds for growth and expansion.