a) The firm cost of capital before taxes. Given: The borrowed money is $125000 at 8\% rate. The investment by the partners is $75000. The required rate of return by the partner is 12\%. b) The firm cost of capital after tax.

geduiwelh

geduiwelh

Answered question

2021-08-21

a) The firm cost of capital before taxes.
Given: The borrowed money is $125000 at 8% rate.
The investment by the partners is $75000.
The required rate of return by the partner is 12%.
b) The firm cost of capital after tax.

Answer & Explanation

Liyana Mansell

Liyana Mansell

Skilled2021-08-22Added 97 answers

a) Calculation:
Write the equation to calculate the cost of the capital (COC).
COC=[(EquityEquity+Debt)×ROE]+[(DebtEquity+Debt)×ROD×(1t)] .....(I)
Here, the amount that the partner has invested is Equity, the amount that firm has borrowed is Debt, the return on equity is ROE, return on debt is ROD, and tax rate is t.
Substitute $75000 for Equity, $125000 for Debt, 12% for ROE, 8% for ROD, and 0% for t in Equation (I).
COC=[($75000$75000+$125000)×0.12]+[($125000$75000+$125000)×0.08×(10)]
=0.045+0.05
=0.095
=9.5%
Conclusion:
Therefore, the firms cost of capital before tax is 9.5%,
b) Calculation:
Substitute $75000 for Equity, $125000 for Debt, 12% for ROE, 8% for ROD, and 30% for t in Equation (I).
COC=[($75000$75000+$125000)×0.12]+[($125000$75000+$125000)×0.08×(10.30)]
=0.045+0.035
=0.08
=8%
Conclusion:
Therefore, the firms cost of capital after tax is, 8%.

Do you have a similar question?

Recalculate according to your conditions!

Ask your question.
Get an expert answer.

Let our experts help you. Answer in as fast as 15 minutes.

Didn't find what you were looking for?