Ask Question
BusinessBusiness
18 February, 05:54

Faris currently has a capital structure of 40 percent debt and 60 percent equity, but is considering a new product that will be produced and marketed by a separate division. The new division will have a capital structure of 70 percent debt and 30 percent equity. Faris has a current beta of 1.1, but is not sure what the beta for the new division will be. AMX is a firm that produces a product similar to the product under consideration by Faris. AMX has a beta of 1.6, a capital structure of 40 percent debt and 60 percent equity and a marginal tax rate of 40 percent. Faris' tax rate is 40 percent. What will be Faris' weighted cost of capital for this new division if the after-tax cost of debt is 7 percent, the risk-free rate is 8 percent, and the market risk premium is 5 percent?

A. 12.15%

B. 11.41%

C. 18.15%

D. 14.27%

+4
Answers (1)
  1. 18 February, 08:44
    0
    11.41%

    Explanation:

    Unlevered beta for new division:

    = Levered beta : [1 + (1 - tax) * D/E]

    = 1.6 : [1 + (1 - 40%) * (40 : 60) ]

    = 1.14

    Beta for Faris's new division:

    = Unlevered beta * [ (1 + (1 - tax) * D/E]

    = 1.14 * [1 + (1 - 40%) * (70 : 30) ]

    = 2.74

    Using CAPM,

    Cost of equity, re = Rf + (beta * MRP)

    = 8% + (2.74 * 5%)

    = 21.71%

    WACC:

    = (wd * rd) + (we * re)

    = (70% * 7%) + (30% * 21.71%)

    = 11.41%
Know the Answer?
Not Sure About the Answer?
Find an answer to your question ✅ “Faris currently has a capital structure of 40 percent debt and 60 percent equity, but is considering a new product that will be produced ...” in 📘 Business if you're in doubt about the correctness of the answers or there's no answer, then try to use the smart search and find answers to the similar questions.
Search for Other Answers
You Might be Interested in
An insured under a life insurance policy has been diagnosed with a terminal illness and has 6 months to live. The insured knows that his financial state will worsen even more with the upcoming medical expenses.
Answers (1)
Which of the following accounts will only be found in the chart of accounts of a merchandising company? a. Accounts Payable b. Accounts Receivable c. Inventory d. Sales
Answers (2)
Lina purchased a prepaid phone card for $15. Long distance calls cost 16 cents a minute using this card. Linda used her card only once to make a long distance call. If the remaining redit on her card if $10.52, how many minutes did her call last?
Answers (1)
In the long run a company that produces and sells candy bars incurs total costs of $1,200 when output is 2,400 candy bars and $1,400 when output is 2,900 candy bars. The candy bar company exhibits a.
Answers (1)
Lawson Corp. uses IFR. S and the cost model for intangible assets. On March 1, year 1, Lawson acquired intangible assets with an indefinite life for $100,000.
Answers (1)
New Questions in Business
How did whirlpool use capabilities of text analytics to better understand their customers and improve product offerings?
Answers (1)
How did the Once-ler encourage his target market to learn more about the thneeds?
Answers (1)
Preparing a Budgeted Income Statement Oliver Company provided the following information for the coming year: Units produced and sold 160,000 Cost of goods sold per unit $6.30 Selling price $11 Variable selling and administrative expenses per unit $1.
Answers (1)
What is NOT one of the three primary resources that families have to reach financial goals?
Answers (1)
Interest groups ___. Are most often set up by or work for elites and corporations Work to influence laws and policies Work to influence court rulings All of these answers
Answers (1)
Home » Business » Faris currently has a capital structure of 40 percent debt and 60 percent equity, but is considering a new product that will be produced and marketed by a separate division.
Sign Up Forgot Password?