Question

Poly's Parrot Shops has found that its cost of common equity capital is 17 percent. It has 7-year maturity semiannual bonds outstanding with a price of $767.03 that have a coupon rate of 7 percent. The firm is financed with $120,000,000 of common shares (market value) and $80,000,000 of debt. What is the after-tax weighted average cost of capital for Poly's, if it is subject to a 35 percent marginal tax rate

Answer 1

Answer:

13.35%

Explanation:

The computation of the  after-tax weighted average cost of capital is shown below:

Weighted average cost of capital is

= Weight of equity × Cost of equity + weight of debt × after cost of debt

where,

Weight of equity = $120,000,000 ÷ $200,000,000 = 0.60

Cost of equity = 17%

Weight of debt = $80,000,000 ÷ $200,000,000 = 0.40

And, after cost of debt is come from applying the rate formula which is shown in the attached spreadsheet i.e 12.13%

So after tax it is

= 12.13% × (1 - 0.35)

= 12.13% × 0.65

= 7.8845%

So, the WACC is

= 0.60 × 17% + 0.40 × 7.8845%

= 10.2%  + 3.1538%

= 13.35%