Question

# Qantas is discussing new ways to recapitalise the firm and raise additional capital. Its current capital...

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%?

Select one:

A. 9.96%

B. 10.25%

C. 10.73%

D. 9.56%

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

Where,
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%
= 9.56%

Ans : Weighted Average Cost of Capital for Qantas is 9.56%.

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