Dusit is financed 24% by debt yielding 8.5%. Investors require a return of 15.5%
ID: 2764980 • Letter: D
Question
Dusit is financed 24% by debt yielding 8.5%. Investors require a return of 15.5% 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.
Weight of debt = 24%
Weight of equity = 76%
Cost of debt before tax = 8.5%
Cost of equity = 15.5%
Tax rate = 35%
WACC = 76% × 15.5% + 24% × 8.5% × (1 – 35%)
= 11.78% + 24% × 5.525%
= 11.78% + 1.326%
= 13.106%
WACC of company is 13.106%.
b.
WACC when there is no tax consideration
WACC = 76% × 15.5% + 24% × 8.5%
= 11.78% + 2.04%
= 13.82%
Hence, WACC when There is no tax rate is 13.82%.
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