Question

# Rumolt Motors has 38 million shares outstanding with a share price of \$ 43 per share....

Rumolt Motors has 38 million shares outstanding with a share price of \$ 43 per share. In​ addition, Rumolt has issued bonds with a total current market value of \$ 1 comma 975 million. Suppose​ Rumolt's equity cost of capital is 14 %​, and its debt cost of capital is 5 %.

a. What is​ Rumolt's pre-tax​ WACC?

b. If​ Rumolt's corporate tax rate is 30 %​, what is its​ after-tax WACC?

a

Equity value = price*shares = 43*38=1634m

 Total Capital value = Value of Equity + Value of Debt =1634+1975 =3609 Weight of Equity = Value of Equity/Total Capital Value = 1634/3609 =0.4528 Weight of Debt = Value of Debt/Total Capital Value = 1975/3609 =0.5472 Cost of Capital = Weight of Equity*Cost of Equity+Weight of Debt*Cost of Debt Cost of Capital = 14*0.4528+5*0.5472 Cost of Capital = 9.0748

b

After tax cost of debt =debt cost*(1-tax rate) = 5*(1-0.3)=3.5%

 After tax Cost of Capital = Weight of Equity*After tax Cost of Equity+Weight of Debt*After tax Cost of Debt After tax Cost of Capital = 14*0.4528+3.5*0.5472 After tax Cost of Capital = 8.2539

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