ABC Systems has 42 million outstanding shares, each worth $10. ABC has an outstanding debt of $94 million. Assume ABC has a 16% equity cost of capital, an 8% debt cost of capital, and a 35 percent corporation tax rate.
a. What is ABC’s unlevered cost of capital?
b. What is ABC’s after-tax debt cost of capital?
c. What is ABC’s weighted average cost of capital?
2.Consider a retailer with a 3.1% net profit margin, 1.85 total asset turnover, $44.4 million in total assets, and $18.2 million in book value of equity.
a)What is the firm’s current ROE?
b)If the firm increased its net profit margin to 3.6%, what would be its ROE?
c)If, in addition, the firm increased its revenues by 23% (while maintaining this higher profit margin and without changing its assets or liabilities), what would be its ROE?
