Rogot Instruments makes fine violins and cellos. It has $1.6 million in debt out

Question

Rogot Instruments makes fine violins and cellos. It has $1.6 million in debt outstanding, equity valued at $2.9 million, and pays corporate income tax at rate 35%. Its cost of equity is 13% and its cost of debt is 5%. What is Rogot's pre-tax WACC? What is Rogot's (effective after-tax) WACC? What is Rogot's pre-tax WACC? Rogot's pre-tax WACC is 10.16%. (Round to two decimal places.) What is Rogot's (effective after-tax) WACC? Rogot's (effective after-tax) WACC is Q%. (Round to two decimal places.)

Explanation / Answer

Total value = 1.6 + 2.9 = 4.5 million

Weight of debt = 1.6 / 4.5 = .355

weight of equity = 2.9 /4.5 = .65

A)

Pre-tax cost of WACC =(5 * .35) + (13 * .65)

                                    = 1.77+ 8.377

                                    = 10.15%

b)

After tax cost of debt = 6 (1- .35) = 6 * .65 = 3.9%

WACC = (3.9 * .355 ) + (13 * .65)

                = 1.384+ 8.32

              = 9.704%

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