10.2) If the same company from the previous question used 5% ROR for loans, 9% R

Question

10.2) If the same company from the previous question used 5% ROR for loans, 9% ROR for bonds, and 14% ROR for stocks, and also used a 50% tax rate, what is the WACC?

Previous qustion for reference: ABC Inc. borrows money at 9%, sells bonds at 8%, and the purchasers of common stock require 9% rate of return. If the company has borrowed $40 million, sold $60 million in bonds, and sold $100 million worth of common stocks, what is the Weighted Average Cost of Capital (WACC)?

Answer to previous question= 8.70%

Explanation / Answer

WACC is weighted average cost of capital and is calculated as Re*We+Rd*(1-t)*Wd+Rb*Wb

Where Re,We are return on Equity and weight of Equity respectively

Where Rd,Wd are cost of debt and weight of debt respectively

and Rb,Wb are the bond rate and bond weight

WACC = 5%*40/200*(1-50%) + 9%*60/200 + 14%*100 / 200 = 10.2%

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