19. The Black Bird Company plans a $45 million expansion. The expansion is to be

Question

19. The Black Bird Company plans a $45 million expansion. The expansion is to be financed by selling $35 million in new debt and $10 million in new common stock. The before-tax required rate of return on debt is 7% percent and the required rate of return on equity is 20% percent. If the company is in the 34 percent tax bracket, what is the weighted average cost of capital? Round the answer to two decimal places in percentage form. Answer 8.04% Step by step instruction 19. The Black Bird Company plans a $45 million expansion. The expansion is to be financed by selling $35 million in new debt and $10 million in new common stock. The before-tax required rate of return on debt is 7% percent and the required rate of return on equity is 20% percent. If the company is in the 34 percent tax bracket, what is the weighted average cost of capital? Round the answer to two decimal places in percentage form. Answer 8.04% Step by step instruction

Explanation / Answer

Calculation of Weighted Average Cost of Capital (WACC)

Capital Structure

Amount $

Equity

10 Million

Debt

45 Million

Total

55 Million

Tax Rate = 34 %

Particulars

Cost of Debt (Kd)

After tax Cost of Debt (1-t)

Share

WACC

Debt

7%

4.62

77.78% (35/45)

= 4.62 * 77.78%

= 3.59%

Particulars

Cost of Equity (Ke)

Share

Equity

20%

22.22% (10/45)

= 20*22.22%

= 4.44%

So WACC = 4.44% + 3.59 % = 8.03%

Capital Structure

Amount $

Equity

10 Million

Debt

45 Million

Total

55 Million

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