Question

1 pts Question 21 Marks Inc. has found that its cost of common equity capital is 12 percent and its cost of debt capital is 13 percent. If the firm is financed with $300,000,000 of common shares (market value) and $700,000,000 of debt, then what is the after-tax weighted average cost of capital for Marks if it is subject to a 35 percent marginal tax rate? 14.10% 9.52% 11.33% 10.43%

Answer 1

=> We can find the after tax weighted average cost of capital using the formula:

E W ACC = [RE [RE* + [RD * *(1 – t)]
, where $R_{E}$ is cost of equity,
Rp
is cost of debt , E is the amount of equity financing, D is the amount of debt financing , V is the amount of total financing (that is E+D) and t is the tax rate.

=> Since all the values are given we can substitute it into the formula:

300,000,000 W ACC = [0.12* 300,000,000 + 700,000,000 (1 – 0.35)] ]+[0.13* 700,000,000 300,000,000 + 700,000,000

=> Therefore, after tax weighted average cost of capital = 9.52 %