Required information [The following information applies to the questions display

Question

Required information [The following information applies to the questions displayed below.] All-Canadian, Ltd. is a multiproduct company with three divisions: Pacific Division, Plains Division, and Atlantic Division. The company has two sources of long-term capital: debt and equity. The interest rate on All-Canadian's $400 million debt is 9 percent, and the company's tax rate is 30 percent. The cost of All-Canadian's equity capital is 12 percent. Moreover, the market value of the company's equity is $600 million. (The book value of All-Canadian's equity is $440 million, but that amount does not reflect the current value of the company's assets or the value of intangible assets.) The following data (in millions) pertain to All-Canadian's three divisions Before-Tax Operating Income $15 40 43 Total Assets $ 75 280 495 Current Liabilities Division Pacific Plains Atlantic Required 1. Compute All-Canadian's weighted-average cost of capital (WACC). (Do not round intermediate calculations. Round your final answer to 2 decimal places (i.e., .1234 should be entered as 12.34).) eighted-average cost of capi

Explanation / Answer

Solution:

Cost of debt (Kd) = Interest rate (1 – Tax) = 9% ( 1-0.30) = 6.30%

Cost of equity (Ke) = 12%

Weighted average cost of capital = Kd * Wd + Ke * We

= 6.30% * (400/1000) + 12% (600/1000) = 9.72%

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