Question

RON Ltd has the following capital structure components:

Five million shares issued with a current market price of 10. Equity holders require a 14% return.

$10 million face value of Corporate bonds outstanding. These bonds pay an annual coupon of 6% and currently trade at a yield to maturity of 6%.

If the firm faces a corporate tax rate of 30%, compute RON Ltd's Weighted Average Cost of Capital (WACC). Enter your answer in decimal form to FOUR decimal places. For example 10.34%, would be entered as 0.1034

Answer 1

Sol: RON Ltd capital structure comprises of Equity Capital: $5,00,00,000 and Debt: $1,00,00,000 total capital thus comes to $6,00,00,000. The weightage of Equity is 0.83 and its Cost is 14% thus WCC equity is 0.1167 and the weightage for Debt is 0.17 and its Cost is 4.20% (=600000*(1-0.30))/10000000) this will eventually give WCC Debt as 0.0070 thus WACC in the above case will be 0.1237