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4 years ago

For which capital component must you make a tax adjustment when calculating a firm’s weighted average cost of capital (WACC)?

Business

1 answer:

Basile [38]4 years ago

4 0

Answer:

1. Debt

2. 8.75%

3. 8.85%

4. 6.195%

Explanation:

For computing the tax adjustment, the Debt capital component is taken

The normal formula to compute WACC is shown below:

= Weightage of debt × cost of debt × ( 1- tax rate) + (Weightage of preferred stock) × (cost of preferred stock) + (Weightage of common stock) × (cost of common stock)

The computation of the pre-tax cost of debt and after-tax cost of debt is shown below:

1. The after tax cost of debt would be

= Pretax cost of debt × ( 1 - tax rate)

= 12.50% × ( 1 - 0.30)

= 8.75%

The NPER represents the time period.

Given that,

Present value = $1,382.73

Assuming figure - Future value or Face value = $1,000

PMT = 1,000 × 13% = $130

NPER = 20 years

The formula is shown below:

= Rate(NPER;PMT;-PV;FV;type)

The present value come in negative

So, after solving this,

3. The pretax cost of debt is 8.85%

4. And, the after tax cost of debt would be

= Pretax cost of debt × ( 1 - tax rate)

= 8.85% × ( 1 - 0.30)

= 6.195%

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