Question

SOLVE ASAP PLEASE *********Your company does not use preferred stocks. The common stock has a beta...

SOLVE ASAP PLEASE

*********Your company does not use preferred stocks.

The common stock has a beta of 1.6.

The market risk premium is 8%.

The risk-free rate is 2%.

The weight of equity is 0.4.

The weight of debt is 0.6.

The pretax cost of debt is 15%.

The tax rate is 20%.

What is the weighted average cost of capital?

A.

13.12%
B.

15.31%
C.

15.68%
D.

16.54%
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Homework Answers

Answer #1

After-tax Cost of Debt

After-tax Cost of Debt = Pre-tax Cost of Debt x (1 – Tax rate)

= 15.00% x (1 – 0.20)

= 15.00% x 0.80

= 12.00%

Cost of Equity

Cost of Equity = Risk-free rate + (Beta x Market risk premium)

= 2.00% + (1.60 x 8.00%)

= 2.00% + 12.80%

= 14.80%

Weighted average cost of capital

Weighted average cost of capital = (After-tax cost of debt x Weight of debt) + (Cost of equity x Weight of Equity)

= (12.00% x 0.60) + (14.80% x 0.40)

= 7.20% + 5.92%

= 13.12%

Therefore, the Weighted average cost of capital is (a). 13.12%

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