Final answer:
To calculate Shi Import-Export's weighted average cost of capital (WACC), we need to determine the after-tax cost of debt (rd) and the cost of equity (re). The WACC formula is WACC = (E/(E+D)) * re + (D/(E+D)) * rd. Using the given information, we can calculate the WACC as 36%.
Step-by-step explanation:
Shi Import-Export's balance sheet shows $300 million in debt, $50 million in preferred stock, and $250 million in total common equity. The tax rate is 25%. To calculate the after-tax cost of debt (rd), we multiply the debt by the tax rate: rd = debt * tax rate = $300 million * 0.25 = $75 million. The weighted average cost of capital (WACC) is calculated using the following formula: WACC = (E/(E+D)) * re + (D/(E+D)) * rd, where E is the equity, D is the debt, re is the cost of equity, and rd is the cost of debt. Assuming the cost of equity is 6% (re = 0.06), we can substitute the values into the formula to calculate the WACC:
WACC = (250/(250+300)) * 0.06 + (300/(250+300)) * 0.075 = 0.27 + 0.09 = 0.36 or 36%