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Cost of equity is 16%; the before tax cost of debt is 13% ; the marginal tax rate is 40%
Cost of equity is 16%; the before tax cost of debt is 13% ; the marginal tax rate is 40%.
Stock sells at book value.
I need to calculate the after tax weighted average cost of capital using the following balance sheet.
Assets Liabilities and Equity
Cash = 120 Long term debt = 1,152
Accounts receivable = 240 Equity = 1,728
Inventory = 360
Plant and equipment = 2,160
Total assets = 2,880 Total liabilities and equity = 2,880
Expert Solution
PFA
Weighted average cost of capital is a calculation of a firm's cost of capital in which each category of capital is proportionately weighted. All capital sources, which include common stock, preferred stock, bonds and any other long-term debt, must be included in a WACC calculation.
WACC is calculated by multiplying the cost of each capital component by its proportional weight and then summing:
Where:
Re = cost of equity
Rd = cost of debt
E = market value of the firm's equity
D = market value of the firm's debt
V = E + D
E/V = percentage of financing that is equity
D/V = percentage of financing that is debt
Tc = corporate tax rate
Then, we can replace the information given into the equation.
WACC = (1,728/2,880)*0.16 + (1,152/2,880)*0.13*(1 - 0.40)
= (0.60)(0.16) + (0.40)(0.13)(0.60)
= 0.096 + 0.0312
= 0.1272 or 12.72%
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