Final answer:
The student's question is about calculating the weighted average cost of capital (WACC) for 'Take it all away', using the given cost of equity, cost of debt, tax rate, and capital structure based on market values. The calculated WACC for 'Take it all away' is approximately 8.32%.
Step-by-step explanation:
The student is asking about calculating the weighted average cost of capital (WACC), which is the average rate of return a company is expected to pay its security holders to finance its assets. The WACC is the minimum return that a company must earn on its existing asset base to satisfy its creditors, owners, and other providers of capital. To calculate the WACC, we need to consider the proportions of debt and equity, the cost of equity, the cost of debt, and the corporate tax rate.
In the given question, Take it all away has a cost of equity of 10.84 percent, a pretax cost of debt of 5.47 percent, and a tax rate of 24 percent. The capital structure of the company is 38 percent debt and 62 percent equity (as the remainder after debt percentage) based on the market value. The formula to calculate the WACC is as follows:
WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc)
Where:
- E = Market value of equity
- V = Total market value of the firm's financing (Equity + Debt)
- Re = Cost of equity
- D = Market value of debt
- Rd = Cost of debt
- Tc = Corporate tax rate
Using the company's given values:
WACC = (0.62 * 10.84%) + (0.38 * 5.47% * (1 - 0.24))
WACC = 6.7208% + 1.596504%
WACC = 8.317304%
Therefore, the company's weighted average cost of capital (WACC) is approximately 8.32%.