Calculate WACC before and after the restructuring. (As we did in class, make a simplifying assumption that your expected ROE is equal to cost of capital, Re)

Question

BlackTom AI · Accepted Answer

The question asks us to calculate WACC before and after a restructuring, with the simplifying assumption that the expected ROE equals the cost of capital (Re).

Option evaluation is tricky here because the provided data is incomplete: there are no explicit answer choices listed in the answer_options field, only a single proposed answer (Before: 25%  After: 25%). Since we must analyze all options, we need to consider what would be needed to justify any such choice.

First, consider the underlying idea: if Re is assumed equal to the cost of capital, and if the restructuring does not change the mix of financing (the overall weighted average cost of capital), then WACC could plausibly stay the same before and after. In a simplified framework, if ROE is used as a stand-in for cost of capital and the firm’s risk and capital structure remain effectively unchanged by the restructuring, WACC might remain constant at the same level.

However, in a real setting, WACC depends on a few key factors: the cost of equity (Re), the after-tax cost of debt, the debt-to-equity mix, and the overall risk profile of the firm. A restructuring could alter leverage, risk, or capital structure, which would typically change WACC. Therefore, without information on any of these elements (debt levels, tax rate, cost of debt, and how the restructuring affects risk), we cannot definitively confirm that both WACC values will be 25%.

Since there are no alternative answer choices to compare, here is how one would evaluate possibilities if more options were present:
- If an option claimed different WACC values before and after (e.g., Before: 28%, After: 22%), we would check whether the restructuring changes leverage or risk in a way that logically changes Re or the after-tax cost of debt, given the same tax rate.
- If an option claimed identical WACC values but stated a change in debt/equity structure without a corresponding change in risk or tax benefits, we would scrutinize whether that constancy is consistent with the assumed equivalence of ROE and cost of capital.

In summary, with the given incomplete option set, the proposed answer (Before: 25% After: 25%) is a plausible outcome under a very specific, highly simplified scenario where structural changes do not affect the overall cost of capital and where Re is held equal to the cost of capital. But without concrete data on leverage, tax rate, and debt costs, we cannot conclusively validate that this is the correct result for both periods.

Note: If additional options were provided, I would systematically assess each one against the assumptions (Re = ROE, unchanged WACC unless leverage or risk changes), and explain why alternatives are consistent or inconsistent with those premises.

FA25-BL-BUS-F305-1130 Problem Set 5 (Please read the instruction)

Calculate WACC before and after the restructuring. (As we did in class, make a simplifying assumption that your expected ROE is equal to cost of capital, Re)

查看解析

登录即可查看完整答案

类似问题

(Continued) What is the cost of capital (WACC) after moving to a 30% debt ratio?

What is WACC of Big Oil?

Suppose that you just received the dividend of $2, which is expected to grow by 1% forever. What is the firm's WACC? Hint: Use dividend growth model in slide 4 of Week10 to calculate Re.

A company has no debt. Its cost of capital is 8.7 percent. Suppose the firm converts to a debt-equity ratio of 0.65. The interest rate on the debt is 6.9 percent. What is its new WACC?

A firm has a cost of debt of 7.5 percent and a cost of equity of 16.2 percent. The debt-equity ratio is 0.45. There are no taxes. What is the firm's weighted average cost of capital?

更多留学生实用工具

考试浏览器助手

风格化写作助手

论文查重助手

文献引用助手

课堂转译助手

课堂笔记助手

Quiz搜索助手

学校历年真题

智能刷题助手

智能匹配练习

希望你的学习变得更简单