Question

​(Weighted average cost of​ capital)  Bane Industries has a capital structure consisting of 61 percent common stock and 39 percent debt. The​ firm's investment banker has advised the firm that debt issued with a ​$1 comma 000 par​ value, 8.1 percent coupon​ (interest paid​ semiannually), and maturing in 20 years can be sold today in the bond market for ​$1 comma 087. Common stock of the firm is currently selling for ​$80.09 per share. The firm expects to pay a ​$1.93 dividend next year. Dividends have grown at the rate of 7.9 percent per year and are expected to continue to do so for the foreseeable future. What is ​ Bane's average cost of capital where the firm faces a tax rate of 34 ​percent?

a. The​ after-tax cost of debt is nothing​%. ​(Round to two decimal​ places.)

b.  The cost of common equity is nothing​%. ​(Round to two decimal​ places.)

c. ​ Bane's average cost of capital is nothing​%. ​(Round to three decimal​ places.)

Answer 1

A. The after tax cost of debt is :

FV= $1000

PV = ($1087)

PMT = $40.5

N= 40 YEARS

SO, I/ Y is = 7.27 (3.63*2)

SO, the after tax cost of debt is = 7.27%*( 1- 0.34)

= 4.7982%

= 4.8% (rounded off to two decimal places)

Cost of equity :

Re = D1/Po + g

= $1.93/ 80.09 + 0.079

= 10.3098%

= 10.31 % (rounded off to two decimal places)

The WACC IS :

WEIGHT OF DEBT * COST OF DEBT + WEIGHT OF EQUITY * COST OF EQUITY:

= 0.39 *0.048 +0.61 *0.1031

=0.0187 + 0.0629

= 8.1591 %

= 8.159% (ROUNDED OFF TO THREE DECIMAL PLACES)