(Weighted average cost of capital) In the spring of last year, Tempe Steel learn

Question

(Weighted average cost of capital) In the spring of last year, Tempe Steel learned that the firm would need to re-evaluate the company's weighted average cost of capital following a significant issue of debt. The firm now has financed 43 percent of its assets using debt and 57 percent using equity. Calculate the firm's weighted average cost of capital where the firm's borrowing rate on debt is 7.9 percent, it faces a 35 percent tax rate, and the common stockholders require a 19.7 percent rate of

Explanation / Answer

Cost of equity = 19.7 %

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

= 7.9*(1-0.35) = 5.135%

weight of debt = 43

weight of equity = 57%

weighted average cost of capital = weight of equity * cost of equity + cost of debt * weight of debt

= 19.7 * .57 + 5.135*.43

=13.44%

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