Unida Systems has 38 million shares outstanding trading for $10 per share. In ad
ID: 2620068 • Letter: U
Question
Unida Systems has 38 million shares outstanding trading for $10 per share. In addition, Unida has $93 million in outstanding debt. Suppose Unida's equity cost of capital is 16%, its debt cost of capital is 7%, and the corporate tax rate is 35%. 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
Number of shares = 38,000,000
Current Price = $10 per share
Value of Equity = 38,000,000 * $10
Value of Equity = $380,000,000
Value of Debt = $93,000,000
Total Value of Firm = Value of Equity + Value of Debt
Total Value of Firm = $380,000,000 + $93,000,000
Total Value of Firm = $473,000,000
Weight of Equity = Value of Equity / Total Value of Firm
Weight of Equity = $380,000,000 / $473,000,000
Weight of Equity = 0.8034
Weight of Debt = Value of Debt / Total Value of Firm
Weight of Debt = $93,000,000 / $473,000,000
Weight of Debt = 0.1966
Answer a.
Unlevered Cost of Capital = Weight of Equity*Cost of Equity + Weight of Debt*Cost of Debt
Unlevered Cost of Capital = 0.8034 * 16% + 0.1966 * 7%
Unlevered Cost of Capital = 14.23%
Answer b.
After-tax Cost of Debt = Cost of Debt * (1 - tax)
After-tax Cost of Debt = 7% * (1 - 0.35)
After-tax Cost of Debt = 4.55%
Answer c.
Weighted Average Cost of Capital = Weight of Equity*Cost of Equity + Weight of Debt*After-tax Cost of Debt
Weighted Average Cost of Capital = 0.8034 * 16% + 0.1966 * 4.55%
Weighted Average Cost of Capital = 13.75%
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