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Q Corporation and R Inc. are two companies with very similar characteristics. The only difference between the two companies is that Q Corp. is an unlevered firm, and R Inc. is a levered firm with debt of $5 million and cost of debt of 10%. Both companies have earnings before interest and taxes (EBIT) of $2 million and a marginal corporate tax rate of 40%. Q Corp. has a cost of capital of 15%. (20 marks total)

a. What is Q’s cost of equity capital?

b. What is R’s cost of equity capital?

c. What is Q’s WACC?

d. What is R’s WACC?

e. Compare the WACC of the two companies. What do you conclude?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M93057687

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