Uop fin370 final exam | Business & Finance homework help

To determine this after-tax rate of return we will need to first calculate what Shawhan’s pre-tax rate of return must be based on their current capital structure and required returns on each component. To do this we can use the weighted average cost of capital (WACC) formula which takes into account all sources of financing: WACC = (E/V) x Re + (D/V) x Rd x (1 – Tc). Where E stands for equity; D stands for Debt; V is total value; Re is required return on Equity; Rd is required return on Debt; and Tc stands for tax rate.

Using our values in our equation above, WACC = {(0.5 x 0.18)+(0.3 x 0.10)}x(1 – 0.40); WACC = 12%. This means that Shawhan would have to earn a pre-tax rate of return equal to 12% in order to generate enough revenue after taxes and still maintain their current level of value.

Finally, if we want the actual after-tax rate that Shawhan needs to make in order to break even then we just need one more equation which is After Tax Rate = Pre Tax Rate/[1-(Tax Rate)]. Using our values here it comes out as follows: After Tax Rate = 12% / [1 – 40%] = 20%. Therefore, given these assumptions Shawhan Supply must earn an after-tax rate or return equal to 20% if they wish.