Question textRio Tinto has $300 million in the capital, of which shareholders contribute 40%. Shareholders' required rate of return is 11% p.a. Creditors charge 6% p.a. interest. Rio Tinto's Weighted Average Cost of Capital is Answer 1 Question 6[input]% (round to 2 d.p)

Question

BlackTom AI · Accepted Answer

First, identify the components of capital and their weights in the firm’s capital structure: equity contributes 40% and debt contributes 60% of the total capital (since shareholders contribute 40% of $300 million, the remaining 60% is financed by creditors).
Next, apply the formula for the weighted average cost of capital (WACC) without tax considerations, as no tax rate is provided: WACC = (E/V) * Re + (D/V) * Rd, where E/V is the weight of equity, D/V is the weight of debt, Re is the cost of equity, and Rd is the cost of debt.
Plug in the given rates: Re = 11% and Rd = 6%. The weights are E/V = 0.40 and D/V = 0.60.
Compute each term: 0.40 * 11% = 4.4% and 0.60 * 6% = 3.6%.
Add them together to obtain the WACC: 4.4% + 3.6% = 8.0%.
Thus, Rio Tinto’s Weighted Average Cost of Capital is 8.00% (rounded to two decimals as requested).
Note: If a tax rate were provided, the formula would include the (1 - Tax) factor for debt, potentially lowering the WACC. In this problem, no tax effect is specified, so the straightforward calculation yields 8.00%.

Question textRio Tinto has $300 million in the capital, of which shareholders contribute 40%. Shareholders' required rate of return is 11% p.a. Creditors charge 6% p.a. interest. Rio Tinto's Weighted Average Cost of Capital is Answer 1 Question 6[input]% (round to 2 d.p)Multiple fill-in-the-blank

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