Question

Ronnie's Comics has found that its cost of common equity capital is 15 percent and its cost of debt capital is 12 percent. The firm is financed with $250,000,000 of common shares (market value) and $750,000,000 of debt. What is the after-tax weighted average cost of capital for Ronnie's, if it is subject to a 35 percent marginal tax rate?

Answer 1

Answer:

The after-tax weighted average cost of capital for Ronnie's Commics is 9.6%

Explanation:

WACC is calculated by the formula

= $\frac{E}{E+D} * Re + \frac{D}{E+D} *Rd *(1-T)$

According to the information given in the question,

E+D= $250,000,000 + $750,000,000 = $1,000,000,000

E = $250,000,000

D = $750,000,000

T = 35%

Re = 15%

Rd = 12%

Substituting the values in the formula,

= $\frac{250,000,000}{1,000,000,000} * 15 + \frac{750,000,000}{1,000,000,000} *12 *(1-0.35)$

= 3.75 + 5.85 = 9.6%