Wytec Corporation plans to raise 50,000,000 worth of fund to finance a research
ID: 2465677 • Letter: W
Question
Wytec Corporation plans to raise 50,000,000 worth of fund to finance a research center. It raises the money through the methods as below. What is the Weighted Average Cost of Capital. Source Funding Cost of Funding Bank Loan 10,000,000 12% per year payable monthly Bond 20,000,000 6% per year paid quarterly common Stock 10,000,000 2.00 dividend per year paid annually, price of stock is 20.00 per share, Retained Earnings 10,000,000 same as Common stock. Income tax rate is taken to be 40% paid annually. Ignore growth rate.Explanation / Answer
Calculation of Weighted Average Cost of Capital :
Source
Funding
Weights
Cost of Funding
Weighted Cost
Calculation
%
A
W = A/50,000,000
B
B*W
Bank Loan
$10,000,000
0.20
Effective Annual Interest Rate after tax =(1+(12%/12))^12 -1 * (1-40%)
7.61%
1.52%
Bond
$20,000,000
0.40
Effective Annual Iinterest rate = (1+(6%/4))^4 -1 *(1-40%)
3.68%
1.47%
Common Stock
$10,000,000
0.20
Dividend / Price = 2/20
10.00%
2.00%
Retained earnings
$10,000,000
0.20
Same as common Stock
10.00%
2.00%
Total
$50,000,000
Weighted Average Cost of Capital
6.99%
Calculation of Weighted Average Cost of Capital :
Source
Funding
Weights
Cost of Funding
Weighted Cost
Calculation
%
A
W = A/50,000,000
B
B*W
Bank Loan
$10,000,000
0.20
Effective Annual Interest Rate after tax =(1+(12%/12))^12 -1 * (1-40%)
7.61%
1.52%
Bond
$20,000,000
0.40
Effective Annual Iinterest rate = (1+(6%/4))^4 -1 *(1-40%)
3.68%
1.47%
Common Stock
$10,000,000
0.20
Dividend / Price = 2/20
10.00%
2.00%
Retained earnings
$10,000,000
0.20
Same as common Stock
10.00%
2.00%
Total
$50,000,000
Weighted Average Cost of Capital
6.99%
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