Question21 Blue Ridge Energy Corp. has the following target capital structure: [table]
Source of capital | Market value | Required rate of return Debt | $24 million | 5.2% Preferred stock | $18 million | 7.4% Common stock | $38 million | 11.6%
[/table] The company’s corporate tax rate is 23%. What is the company’s weighted average cost of capital (WACC)?(Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Answer: [input]% Maximum marks: 3 Flag question undefined

Question

BlackTom AI · Accepted Answer

WACC = wd*(rd*(1 − Tc)) + wp*rp + we*re.

1) Relevant concepts
- WACC is the after-tax weighted average of the costs of each capital component (debt, preferred stock, common equity) using market-value weights.
- Interest on debt is tax-deductible, so use the after-tax cost of debt rd*(1 − Tc). Preferred and common equity costs are not tax-deductible.
- Convert percentage rates to decimals and use market values to compute weights.

2) Step-by-step reasoning and intermediate steps
- Compute total market value:
  Total = Debt + Preferred + Common = 24 + 18 + 38 = 80 (million).
- Compute weights (market-value proportions):
  wd = 24 / 80 = 0.3000
  wp = 18 / 80 = 0.2250
  we = 38 / 80 = 0.4750
- Convert nominal costs to decimals and apply tax to debt:
  rd = 5.2% = 0.052
  Tc = 23% = 0.23
  After-tax rd = 0.052 * (1 − 0.23) = 0.052 * 0.77 = 0.04004 (4.004%)
  rp = 7.4% = 0.074
  re = 11.6% = 0.116
- Multiply weights by respective costs:
  Debt contribution = wd * after-tax rd = 0.3000 * 0.04004 = 0.012012
  Preferred contribution = wp * rp = 0.2250 * 0.074 = 0.016650
  Equity contribution = we * re = 0.4750 * 0.116 = 0.055100
- Sum contributions:
  WACC = 0.012012 + 0.016650 + 0.055100 = 0.083762

3) Final result and rounding
- WACC = 0.083762 = 8.3762% → rounded to two decimal places = 8.38%.

4) Why this answer is correct
- The calculation uses market-value weights, applies the tax shield to debt only, and uses the given required returns; all standard WACC principles are followed.

5) Common mistakes (why other possible answers would be wrong)
- Using pre-tax debt cost (would overstate WACC).
- Using book values instead of market values (weights would change).
- Rounding intermediate steps too early (small rounding errors can slightly change the result).

Conclusion: The weighted average cost of capital is 8.38%, which matches the provided answer.

类似问题

Shim Interiors has a target debt-equity ratio of .40. Its cost of equity is 13.5 percent and its pretax cost of debt is 5.5 percent. Its tax rate is 21 percent. What is the company's WACC?

A firm has 250M shares trading at $20, debt of $5,000M with a pre-tax cost of debt of 8%, equity β = 1.50, risk-free rate = 4%, ERP = 6%, and tax rate = 30%. Compute WACC. (Answer in percent, 2 decimals.)

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