question archive The BA720 Company has $15 million in pretax income, a tax rate of 30%, and a capital structure mix that is comprised of 78% in equity and 22% million in long term debt [market value basis]
The BA720 Company has $15 million in pretax income, a tax rate of 30%, and a capital structure mix that is comprised of 78% in equity and 22% million in long term debt [market value basis]
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The BA720 Company has $15 million in pretax income, a tax rate of 30%, and a capital structure mix that is comprised of 78% in equity and 22% million in long term debt [market value basis]. The cost of debt is 9% and cost of equity is 12%. a) What is the company’s weighted average cost of capital? b) What is the value of the company?
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Answer:
a)
After-tax cost of debt = cost of debt*(1-tax rate)
After-tax cost of debt = 9*(1-30%)
After-tax cost of debt = 6.30%
weighted average cost of capital = Weight of Debt*After-tax cost of debt + Weight of Equity*cost of equity
weighted average cost of capital = 78%*6.3 + 22%*12
weighted average cost of capital = 7.554%
b)
Value of Company = Pretax operating income*(1-tax rate)/weighted average cost of capital
Value of Company = 15*(1-30%)/7.554%
Value of Company = $ 139 Million
