Final answer:
The company's cost of capital is calculated using the Weighted Average Cost of Capital formula. After integrating the given equity, debt, costs, and tax rate, the WACC is approximately 11.71%, which matches option c.
Step-by-step explanation:
The student is asking about calculating the cost of capital for NSZ Ltd. To find the company's cost of capital, we need to use the Weighted Average Cost of Capital (WACC) formula, which takes into account the proportion of equity and debt financing, the cost of equity, the cost of debt, and the tax rate.
The formula for WACC is: WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc), where E is the market value of equity; V is the total value of equity and debt; Re is the cost of equity; D is the market value of debt; Rd is the cost of debt; and Tc is the corporate tax rate.
Using the provided figures, the WACC calculation would be as follows:
- Equity (E) = $15 million
- Debt (D) = $20 million
- Total Value (V) = E + D = $15 million + $20 million = $35 million
- Cost of equity (Re) = 18%
- Pre-tax cost of debt (Rd) = 10%
- Tax rate (Tc) = 30%
WACC = (15/35) * 0.18 + (20/35) * 0.10 * (1 - 0.30).
After computing these values, we find the WACC to be approximately 11.71%, which closely matches option c. Therefore, the correct answer is c. 11.71%