Question

Unida Systems has 44 million shares outstanding trading for $8 per share. In? addition, Unida has $81 million in outstanding debt. Suppose? Unida's equity cost of capital is 18%?, its debt cost of capital is 7%?, and the corporate tax rate is 39%. a. What is? Unida's unlevered cost of? capital? b. What is? Unida's after-tax debt cost of? capital? c. What is? Unida's weighted average cost of? capital?

Answer 1

a) Unlevered Cost of Capital assumes the company is 100% equity financed. Therefor unlevered cost of capital and Cost of equity are one and the same

Unlevered Cost of Capital= 18%

b) After Tax debt cost of capital = cost of debt * (1 – Tax rate)

Cost of debt = 7%

Tax rate = 39% or 0.39

After Tax debt cost of capital = 7 ( 1-0.39) = 4.27%

c) Weighted Average Cost of Capital (WACC) =Equity/[debt + equity]*rE + Debt/ [debt + equity] * rD * (1- Tax rate)

Equity= 44 million share * $8 per share = 352 million

Debt= 81 million

rE = Cost of Equity = 18%

rD = Cost of debt = 7%

Tax rate = 39%

Weighted Average Cost of Capital (WACC) = 352/[81+352]*18% + 81/[81+352]*7%*(1-0.39)

=352/433*18% + 81/433 * 4.27%

=14.63 + 0.80

=15.43%