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# 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...

 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 [ßA] 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 %
Answered Same Day Dec 25, 2021

## Solution

David answered on Dec 25 2021
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) = 0.24247
Cost of equity (ke) =...
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