1. Fama’s Llamas has a WACC of 9.5 percent. The company’s cost of equity is 11.6 percent, and its pretax cost of debt is 7.7 percent. The tax rate is 34 percent.
What is the company’s target debt–equity ratio?
2. Liberty Services is now at the end of the final year of a project. The equipment originally cost $20,000, of which 75% has been depreciated. The firm can sell the used equipment today for $6,000, and its tax rate is 40%. What is the equipment's after-tax salvage value for use in a capital budgeting analysis? Note that if the equipment's final market value is less than its book value, the firm will receive a tax credit as a result of the sale.
a. $6,328
b. $5,992
c. $5,712
d. $5,040
e. $5,600
3. Company A has an unlevered beta equal to 1.2. The company has a debt equal to $20,000,000 and a levered beta equal to 1.9. Assume we have perfect competitive markets and there is no taxation. If the risk free rate is 2.00% and the expected return of the market portfolio is 6.00%, what is the company’s wacc?
A. 6.80% B. 7.27% C. 8.00% D. 9.60%