Question

Dusit is financed 26% by debt yielding 8.3%. Investors require a return of 15.3% on Dusit’s equity. a. What is the company’s weighted-average cost of capital if the corporate tax rate is 21%? b. What would be the company’s cost of capital if it were exempted from corporate tax? (For all the requirements, do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.

Answer 1

1)

Weight of debt = 26%

Weight of equity = 100% - 26% = 74%

Cost of capital = Weight of debt*after tax cost of debt + weight of equity*cost of equity

Cost of capital = 0.26*0.083*(1 - 0.21) + 0.74*0.153

Cost of capital = 0.017048 + 0.11322

Cost of capital = 0.1303 or 13.03%

2)

Weight of debt = 26%

Weight of equity = 100% - 26% = 74%

Cost of capital = Weight of debt*cost of debt + weight of equity*cost of equity

Cost of capital = 0.26*0.083 + 0.74*0.153

Cost of capital = 0.02158 + 0.11322

Cost of capital = 0.1348 or 13.48%