Question

Rogot Instruments makes fine violins and cellos. It has ​$1.3 million in debt​ outstanding, equity valued at ​$2.8 million and pays corporate income tax at rate 21%. Its cost of equity is 13% and its cost of debt is 6%. a. What is​ Rogot's pretax​ WACC? b. What is​ Rogot's (effective​ after-tax) WACC?

Answer 1

Debt oustanding = $1.3 million

Total Equity Value = $2.8 million

Total capital structure = $1.3 million + $2.8 million = $4.1 million

a). Calculating Rogot's pretax​ WACC:-

WACC= (Weight of Debt)(Cost of Debt) + (Weight of Equity)(Cost of Equity)

WACC = (1.3 million/4.1 million)(6%) + (2.8 million/4.1 million)(13%)

WACC = 1.9024% + 8.8780%

WACC = 10.78%

So, Rogot's pretax​ WACC is 10.78%

b). Calculating Rogot's (effective​ after-tax) WACC:-

WACC= (Weight of Debt)(Cost of Debt)(1 - tax rate) + (Weight of Equity)(Cost of Equity)

WACC = (1.3 million/4.1 million)(6%)(1-0.21) + (2.8 million/4.1 million)(13%)

WACC = 1.5029% + 8.8780%

WACC = 10.38%

So, Rogot's (effective​ after-tax) WACC is 10.38%

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