Omega Corporation has 11.2 million shares outstanding, now trading at $53 per share. The firm has...

Question

Omega Corporation has 11.2 million shares outstanding, now trading at $53 per share. The firm has estimated the expected rate of return to shareholders at about 12%. It has also issued long-term bonds at an interest rate of 9%. It pays tax at a marginal rate of 35%. Assume a $190 million debt issuance.

a.	What is Omega’s after-tax WACC? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Omega’s after-tax WACC

%

b.

How much higher would WACC be if Omega used no debt at all? (Hint: For this problem you can assume that the firm’s overall beta [ß_A] is not affected by its capital structure or by the taxes saved because debt interest is tax-deductible.) (Do not round intermediate calculations. Round your answer to 2 decimal places.)

WACC

%

David · Accepted Answer

a) Unit value of share = $ 53 
Number of shares outstanding = 11.2 million 
Total market value of shares = 53*11.2 = $ 593.6 million 
Market value of debt = $190 million 
Weight of equity (we) = 593.6/(593.6+190) = 0.7575 
Weight of debt(wd) = 190/(593.6+190) = 0.

Omega Corporation has 11.2 million shares outstanding, now trading at $53 per share. The firm has estimated the expected rate of return to shareholders at about 12%. It has also issued long-term bonds...

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