Qantas is discussing new ways to recapitalise the firm and raise additional capital. Its current capital structure has a 30% weight in ordinary shares, 10% in preference shares, and 60% in debt. The cost of equity capital is 17%, the cost of preference shares is 11%, and the pretax cost of debt is 8%. What is the weighted average cost of capital for Qantas if its marginal tax rate is 30%?
Ans : Weighted Average cost of Capital is the average return a company is expected to pay to its all security holders.
It is Calculated as below :
WACC = Ke * Equity proportion + Kp * % Preference proportion + Kd after tax * Debt Proportion
Ke = Cost of Equity
Kp = Cost of Preference Stock
Kd after tax = Cost of Debt * (1-Tax rate) = 8% * (1-30%) = 5.6%
WACC = (17% * 0.30) + (11% * 0.10) + ( 5.6% * 0.60)
= 5.1% + 1.1% + 3.36%
Ans : Weighted Average Cost of Capital for Qantas is 9.56%.
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