Rogot Instruments makes fine violins and cellos. It has $1.3 million in debt out

Question

Rogot Instruments makes fine violins and cellos. It has $1.3 million in debt outstanding, equity valued at $2.3 million and pays corporate income tax at rate 38%. Its cost of equity is

13% and its cost of debt is 6%.

a. What is Rogot's pretax WACC?

b. What is Rogot's (effective after-tax) WACC?

a.What is Rogot's pretax WACC?

Rogot's pretax WACC is _%. (Round to two decimal places.)

b. What is Rogot's (effective after-tax) WACC?

Rogot's (effective after-tax) WACC is _%. (Round to two decimal places.)

Explanation / Answer

Total value = 1.3 + 2.3 = 3.6 million

Weight of debt = 1.3 / 3.6 = .36

weight of equity = 2.3 /3.6 = .64

A)pretax cost of WACC =(6 * .36) + (13 * .64)

                                    = 2.16+ 8.32

                                    = 10.48%

b)After tax cost of debt = 6 (1- .38) = 6 * .62 = 3.72%

WACC = (3.72 * .36 ) + (13 * .64)

                = 1.34+ 8.32

              = 9.66%

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