Question

8. Company Z provides financial services for its customers. They have debt of $25 million of which they pay $1.8 million per annum in interest expense. They have $105 million in common stock at 6%. The company's Beta is 1.1 and the risk-free rate is 2.5%. The tax rate is 40%. What is the cost of debt? What is the cost of equity? What is the WACC?

Answer 1

Cost of Debt = Int Exp / Debt

= $ 1.8 M / $ 25 M

= 7.2%

Post Tax cost of Debt = Cost of Debt (1-T)

= 7.2% ( 1 - 0.4)

= 7.2% * 0.6

= 0.0432 i.e 4.32%

Cost of Equity:

6% (Given)

WACC = Weighted Avg cost of sources in capital structure.

Source	Amt (in M)	Weight	Cost	Wtd Cost
Equity	$    105.00	0.8077	6.00%	4.85%
Debt	$      25.00	0.1923	4.32%	0.83%
WACC				5.68%

Pls comment, if any further assistance is required.