Rumolt Motors has 35 million shares outstanding with a price of $14 per share.

Rumolt Motors has 35 million shares outstanding with a price of $14 per share. In addition, Rumolt has issued bonds with a total current market value of $521 million. Suppose Rumolt's equity cost of capital is 10%, and its debt cost of capital is 5%.

a. What is Rumolt's pretax weighted average cost of capital?

b. If Rumolt's corporate tax rate is 21%,

what is its after-tax weighted average cost of capital?

a. What is Rumolt's pretax weighted average cost of capital?

Rumolt's pretax weighted average cost of capital is nothing%.

(Round to two decimal places.)

Solutions

Expert Solution

Total value of equity=35*14

=$490 million

Total value=(490+521)=$1011 million

a.WACC=Respective cost*Respective weight

=(490/1011*10)+(521/1011*5)

=7.42%(Approx)

b.Cost of debt after-tax=5*(1-tax rate)

=5*(1-0.21)=3.95%

WACC=Respective cost*Respective weight

=(490/1011*10)+(521/1011*3.95)

=6.88%(Approx)

jeff jeffy answered 2 years ago

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