BE16.11 (LO 4) Tomba Corporation had 300,000 shares of common stock outstanding on January 1, 2020. On May 1, Tomba issued 30,00
1 answer:
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Answer: 9.03%.
Explanation:
Given: The Two Dollar Store has a cost of equity of 11.9 percent, the YTM on the company's bonds is 6.2 percent, and the tax rate is 40 percent.
Debt to equity ratio is .54
i.e.
Adding denominator to numerator on both the sides, we get,
i.e. Weighted equity =
From (i)
Adding denominator to numerator on both the sides we get,
Thus, weight of debt=
Now,
Weighted average cost of capital=(Weight of equity) × (cost of equity)+(Weight of debt)×(Cost of debt)×(1-tax rate)
Hence, the weighted average cost of capital is 9.03%.