Question22 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

1. Relevant knowledge points and concepts
WACC is the weighted average of the costs of a firm’s sources of capital, 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-adjusted. Use weights = market value of each source divided by total market value.

2. Step-by-step reasoning and intermediate calculations
Total market value = Debt + Preferred + Common = 24 + 18 + 38 = 80 (million).

Weights:
- wd = 24 / 80 = 0.30
- wp = 18 / 80 = 0.225
- we = 38 / 80 = 0.475

Convert required returns to decimals:
- rd = 5.2% = 0.052
- rpref = 7.4% = 0.074
- re = 11.6% = 0.116

After-tax cost of debt:
- rd(1 − Tc) = 0.052 × (1 − 0.23) = 0.052 × 0.77 = 0.04004 (4.004%)

Compute weighted components:
- Debt contribution = wd × rd(1 − Tc) = 0.30 × 0.04004 = 0.012012
- Preferred contribution = wp × rpref = 0.225 × 0.074 = 0.01665
- Equity contribution = we × re = 0.475 × 0.116 = 0.0551

Sum to get WACC:
WACC = 0.012012 + 0.01665 + 0.0551 = 0.083762 = 8.3762%

3. Why the correct answer is correct
The calculation applies the WACC formula correctly, uses market-value weights, and correctly reduces the cost of debt for the corporate tax rate. Each component is weighted and summed, giving 8.3762%, which rounds to 8.38%.

4. Why common mistakes would be wrong
- Omitting the tax adjustment on debt overstates WACC.
- Using book values instead of market values changes the weights incorrectly.
- Rounding intermediate steps too early can slightly alter the final rounded percentage.

5. Conclusion
Using market-value weights and the after-tax cost of debt yields a WACC of 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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