Dusit is financed 25% by debt yielding 8.4%. Investors require a return of 15.4%

Question

Dusit is financed 25% by debt yielding 8.4%. Investors require a return of 15.4% on Dusit’s equity.

a. What is the company’s weighted-average cost of capital if the corporate tax rate is 35%? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Weighted-average cost of capital %

b. What would be the company’s cost of capital if it were exempted from corporate tax? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Weighted-average cost of capital %

Explanation / Answer

a)WACC = wd(rd)(1 – T) + wc(rs) =

0.25*8.48*(1-0.35)+(1-0.25)*15.4

=12.93%

b)

WACC = wd(rd) + wc(rs) =

0.25*8.48+(1-0.25)*15.4

=13.67%

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