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6G2 The Black Bird Company plans an expansion. The expansion is to be financed by selling...

6G2

The Black Bird Company plans an expansion. The expansion is to be financed by selling $128 million in new debt and $134 million in new common stock. The before-tax required rate of return on debt is 10.99% percent and the required rate of return on equity is 17.91% percent. If the company is in the 34 percent tax bracket, what is the weighted average cost of capital?

Round the answer to two decimal places in percentage form. (Write the percentage sign in the "units" box)

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Answer #1

Value of debt= $128 million

Value of equity= $134 million

Total value of firm= $128 million + $134 million

= $262 million

Weight of debt= $128 million/ $262 million

= 0.4885

Weight of equity= $134 million/ $262 million

= 0.5115

The weighted average cost of capital is calculated using the below formula:

WACC=Wd*Kd(1-t) + We*Ke

where:

Wd= Percentage of debt in the capital structure.

Kd= The before tax cost of debt

We=Percentage of equity in the capital structure

Ke= The cost of common equity.

T= Tax rate

WACC= 0.4885*10.99%*(1 - 34) + 0.5115*17.91%

= 0.4885*7.25% + 0.5115*17.91%

= 3.5433% + 9.1610%

= 12.7043% 12.70%.

In case of any query, kindly comment on the solution.

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