Rumolt Motors has 13 million shares outstanding with a share price of $38 per sh
ID: 2751285 • Letter: R
Question
Rumolt Motors has 13 million shares outstanding with a share price of $38 per share. ln addition, Rumolt has issued bonds with a total current market value of $320 million. Suppose Rumolt's equity cost of capital is 13%, and its debt cost of capital is 9%.
a. What is Rumolt's pretax weighted average cost of capital?
b. IfRumolt's corporate tax rate is 30%, what is its after-tax weighted average cost of capital?
a. What is Rumolt's pretax weighted average cost of capital?
Rumolt's pretax weighted average cost of capital is _%. (Round to two decimal places.)
b. lfRumolt's corporate tax rate is 30%, what is its after-tax weighted average cost of capital? Rumolt's after-tax weighted average cost of capital is _%. (Round to two decimal places.)
Explanation / Answer
Market value of equity = price*number of shares =13*38 = 494m
pretax WACC = cost of debt*Market value of debt/(Market value of equity+Market value of debt)+cost of equity*Market value of equity/(Market value of equity+Market value of debt)
= 9*320/(320+494)+13*494/(494+320) = 11.43%
after taxWACC = cost of debt*(1-tax rate)*Market value of debt/(Market value of equity+Market value of debt)+cost of equity*Market value of equity/(Market value of equity+Market value of debt)
= 9*(1-.3)*320/(320+494)+13*494/(494+320) = 10.37%
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