Unida Systems has 42 million shares outstanding trading for $ 10 per share. In?

Question

Unida Systems has 42 million shares outstanding trading for $ 10 per share. In? addition, Unida has $ 96 million in outstanding debt. Suppose? Unida's equity cost of capital is 16 % ?, its debt cost of capital is 9 % ?, and the corporate tax rate is 31 % . a. What is? Unida's unlevered cost of? capital? b. What is? Unida's after-tax debt cost of? capital? c. What is? Unida's weighted average cost of? capital?

a. What is? Unida's unlevered cost of? capital? ?Unida's unlevered cost of capital is ____ ?%. ? (Round to one decimal? place.)

b. What is? Unida's after-tax debt cost of? capital? ?Unida's after-tax debt cost of capital is ____?%. ? (Round to one decimal? place.)

c. What is? Unida's weighted average cost of? capital? ?Unida's weighted average cost of capital is _____ ?%. ? (Round to one decimal? place.)

Explanation / Answer

ANSWER:

1) Equity = no of shares outstanding * cost per share = 42 million shares * $10 = $420 million

debt = $96 million

% of equity = equity / (equity + debt ) = 420 / ( 420 + 96 ) = 420 / 516 = 0.8139 or 81.39%

% of debt = 1 - % of equity = 1 - 81.39% = 1 - 0.8139 = 0.1861 or 18.61%

unlevered cost of capital = % of equity * cost of capital + % of debt * cost of debt

unlevered cost of capital = 81.49% * 16% + 18.61% * 9% = 0.1302 + 0.01607 = 0.1469 = 14.69%

2) After tax cost of capital = debt cost of capital * ( 1 - tax rate)

after tax cost of capital = 9% * ( 1 - 31%) = 9% * 0.69 = 0.0621 or 6.21%

3) wacc = wc * rc + wd * rd * ( 1 - tax rate)

rd * ( 1 - tax rate ) = 6.21%

wacc = 0.8139 * 16% + 0.1861 * 6.21%

wacc = 0.1302 + 0.0115 = 0.1417 = 14.17%

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