Question

Cullumber and Telecommunications Corporation has three divisions. The names of these divisions, along with the after-tax cost of capital for each division and the market value of the assets in each division, are as follows:

Division Name		Cost of Capital			MV of Assets
Infrastructure development		6.85			$195,000,000
Power		6.00			$254,000,000
Telecommunications		6.45			$527,000,000

What is the overall after-tax cost of capital for Cullumber and Telecommunications? (Round answer to 2 decimal places, e.g. 52.75%.)

After-tax cost of capital %

Answer 1

Overall after-tax cost of capital for Cullumber and Telecommunications

Overall after-tax cost of capital is the weighted average cost of capital for the Cullumber and Telecommunications

Total MV of Assets = $97,60,00,000 [$19,50,00,000 + $25,40,00,000 + $52,70,00,000]

Overall after-tax cost of capital = [6.85% x ($19,50,00,000 / $ 97,60,00,000)] + [6.00% x ($25,40,00,000 / $ 97,60,00,000)] + [6.45% x ($52,70,00,000 / $97,60,00,000)]

= [6.85% x 0.1998] + [6.00% x 0.2602] + [6.45% x 0.5400]

= 1.37% + 1.56% + 3.48%

= 6.41%

“Hence, the Overall after-tax cost of capital for Cullumber and Telecommunications would be 6.41%”