RON Ltd has the following capital structure components: Five million shares issu

Question

RON Ltd has the following capital structure components:

Five million shares issued with a current market price of 5. Equity holders require a 13% return.

$10 million face value of Corporate bonds outstanding. These bonds pay an annual coupon of 6% and currently trade at a yield to maturity of 6%.

If the firm faces a corporate tax rate of 30%, compute RON Ltd's Weighted Average Cost of Capital (WACC). Enter your answer in decimal form to FOUR decimal places. For example 10.34%, would be entered as 0.1034

Explanation / Answer

so WACC = .1049 (approx)

**       calculattion of    Weights

Debt =   10 million          10 /35    =.2857

Equity = 25 million         25/35   = .7143

Total =    35 million

**Cost of debt = Interest rate (1-tax)

                      6(1-.30) = 4.2%

Cost(a) weights(b) weighted average (a*b) Debt 4.2 .2857 1.1999 Equity 13 .7143 9.2859 WACC 10.4858 %

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