Question

Master Company has 3 million shares of common stock trading at $50 dollars per share on...

Master Company has 3 million shares of common stock trading at $50 dollars per share on which investors expect a return of 16%. The company also has debt with a market value of $70 million with a pretax cost of 7%. What is the weighted average cost of capital if the tax rate is 40%? Master has no preferred stock outstanding.

a.

11.8%​

b.

13.2%​

c.

7.87%​

d.

8.77%​
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Answer #1
WACC is 12.25%
Statement showing computations
Particulars No   Cost MV Weight Cost WACC
Common Stock    3,000,000.00                50.00    150,000,000.00             0.6818 16.00% 10.91%
Debt      70,000,000.00             0.3182 4.20% 1.34%
   220,000,000.00             1.0000 12.25%
Pretax cost of debt 7.0%
Tax Rate 40%
kd = 7%(1-.40) 4.20%
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