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

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

Step-by-step explanation:

WACC is calculated by the formula

=
`(E)/(E+D) * Re + (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,

=
`(250,000,000)/(1,000,000,000) * 15 + (750,000,000)/(1,000,000,000) *12 *(1-0.35)`

= 3.75 + 5.85 = 9.6%