Where:
Re = cost of equity
Rd = cost of debt
E = market value of the firm's equity
D = market value of the firm's debt
V = E + D
Tc = corporate tax rate

D/V and E/V Ratio:

Since the target debt ratio of Dixon is given to be about 35%, we assume the target D/V ratio for Colinsville investment to be the same. Hence the E/V ratio = 1 ' D/V = 65%. Given the fact that Dixon and Collinsville are both specialty chemicals producing operations, the target leverage ratio of 35% for Dixon is reasonably assumed to apply to Collinsville.

Cost of Debt:

Cost of debt for Collinsville is estimated based on the long-term BBB corporate bonds at 11.25%, which is also the actual interest rate that Dixon would be paying to its creditors for financing Collinsville.

Cost of Equity:

Re = Rf + (β * Market Premium)

Cost of equity for Collinsville is estimated with the risk free rate based on long-term Treasury bonds at 9.5% since Dixon estimates the plant’s physical life to be 10 years. A historical estimate of 7.25% is used for market risk premium (the average of the historical market risk premium range of 7.0 to 7.5%).

Even though Dixon plans to finance the Collinsville investment with 100% debt, this is an internal financial decision, whereas cost of capital would be estimated based on market or optimal leverage ratios. Therefore, market value-based information on the most comparable sodium chlorate producers (i.e. Brunswick Chemical and Southern Chemicals who specialize in producing sodium chlorate) are obtained to estimate the appropriate unlevered beta for Collinsville at 1.09. As a result, Collinsville’s estimated relevered beta is 1.39.

Re = 9.5% + (1.39 * 7.25%) = 19.57%

Tax Rate:

From the perspective of Dixon Corporation, the cost of capital evaluation would start out in...

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The WACC equation is the cost of each capital component multiplied by its...

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(10% weighting)
Answer
The hurdle rate is the rate of return a firm has to offer finance providers to induce them to buy and hold financial security. (Arnold,2007). This is also known as cost of capital or weighted average cost of capital. The returns offered by alternative securities with the same...

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* Euribor is 2%
* Before tax cost of debt = 5%
* Tax rate = 30%
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* Current year’s dividend = €3/ share
* Applicable...

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Payback, discounted payback NPV IRR, MIRR
The Cost of Capital
• Cost of Capital Components
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• WACC
Should we focus on historical (embedded) costs or new (marginal) costs?
The cost of capital is used primarily to make decisions which involve raising and investing new capital. So, we should focus on marginal costs.
What types of long-term capital do organizations use?
nLong-term...

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| Less Prone to serious errors than WACC. | Income from stocks- as opposed to bonds- may be taxed differently when the...

...weighted average cost of capital (WACC) to be 8.3%. I find error in this calculation as a result of the following points of disagreement:
a) Weighting of Capital Structure: Use of book values of capital rather than the market values
b) Cost of Debt Calculation: Incorrect method for calculating debt
c) Tax Rate: Use of a tax rate derived from the summation of state and statutory taxes instead of the firm's marginal tax rate
2. Revised Calculation of...

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