Rumolt Motors has 22 million shares outstanding with a share price of $ 48 per share. In addition, Rumolt has issued bonds with a total current market value of $ 1 comma 168 million. Suppose Rumolt's equity cost of capital is 14 %, and its debt cost of capital is 11 %. a. What is Rumolt's pre-tax WACC? b. If Rumolt's corporate tax rate is 40 %, what is its after-tax WACC? a. What is Rumolt's pre-tax WACC?

pre-tax WACC is 12.43%

Explanation:

pre-tax WACC=E/V*ke+D/V*kd

E is the market value of equity which is 22 million*48=$1,056  million

D is the value of debt which $1,168 million

V is the total finance of debt and equity available at Rumolt Motors' disposal which is calculated as =$1,056  million+ $1,168 million=$ 2,224 million.

ke is the cost of equity given as 14%

kd is the cost of debt which is provided as 11%

The part of the formula that deals with tax is not included as the requirement is pre-tax weighted average cost of capital

pre-tax WACC=1056/2224*14%+1168/2224*11%

pre-tax WACC=12.43%

The pre-tax WACC Iis 12.43%

Rumolt's pre-tax WACC = 12.4244

After-tax WACC = 10.11

Explanation:

Equity value =22million * $48 per share  =1056

Value of debt = $1168

Equity cost = 14 %

Dept cost = 11 %

Tax rate =40%

Total Capital value = Value of Equity + Value of Debt

                                =1168+1056

                                 =$2224

Weight of Equity = Value of Equity/Total Capital Value

                           =1056/ 2224

                            =0.4748

Weight of Debt = Value of Debt/Total Capital Value

                           =1168/ 2224

                           =0.5252

Cost of Capital =

Weight of Equity*Cost of Equity+Weight of  Debt*Cost of Debt

Cost of Capital = 0.4748 *14 + 0.5252*  11

                         = 12.4244

Rumolt's pre-tax WACC = 12.4244

(b):

After tax cost of debt =debt cost*(1-tax rate)

                                    = 11*(1-0.4)=6.6%

After tax Cost of Capital = Weight of Equity* After tax Cost of Equity+ Weight of Debt* After tax Cost of Debt

After tax Cost of Capital = 0.4748 *14 + 0.5252* 6.6

After-tax WACC = 10.11

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