Our corp. has a cuurent capital structure of 18 million insecured bonds paying 6

Question

Our corp. has a cuurent capital structure of 18 million insecured bonds paying 6.5% annual interest, and common stock with amarket value of 42million. its marginal tax rate is 40% and itscost of common equity capital is 13% What are the capital structure weights? Calculate companysweighted average costs of capital Our corp. has a cuurent capital structure of 18 million insecured bonds paying 6.5% annual interest, and common stock with amarket value of 42million. its marginal tax rate is 40% and itscost of common equity capital is 13% What are the capital structure weights? Calculate companysweighted average costs of capital

Explanation / Answer

The Weighted Average Cost of Capital (WACC) iscalculated as:

WACC = (E/V) * RE + (D/V) * RD *(1-Tc)

Where, Tc = Corporate tax rate,

           E = Market value of the firm’s Equity

           D = Market value of the firm’s Debt

E/V = Percentage of the firm’s financing (in market valueterms) that is equity

D/V = Percentage of the firm’s financing in debt.

Current Capital Structure:

Debt              18 Million

Equity            42 Million

Total               $60 Million

Marginal Tax rate = 40%

Weighted Average Cost of Capital (WACC) =(E/V)*RE + (D/V)*RD(1-Tc)

E/V = 42 Million / 60Million      

E/V = 0.70

D/V = 18 Million / 60 Million  = 0.30

D/V = 0.30

Cost of Common Equity (RE) = 13%

Cost of Debt (before tax) (RD) = 6.5%

WACC = (0.70)*13% + (0.30)*6.5% (1-40%)

            = (0.70)*0.13 + (0.30)*0.065(0.6)

            = 0.091 + 0.039

            = 0.13 (or) 13%

                                         WACC= 13%

Related Questions

Navigate

• Browse (All)
• Browse O
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.