Use the information below to answer the following question(s).Brandorf Company has two sources of funds: long term debt with a market and book value of $9 million issued at an interest rate of 10 percent; and, equity capital that has a market value of $6 million (book value of $2 million).The cost of equity capital is 5 percent, while the tax rate is 30 percent.Brandorf Company has profit centres in the following locations with the following data:

-A company's weighted-average cost of capital [WACC] was 9.6% last year.The company has $6,000,000 of bonds payable (its only debt)with a 9.25% coupon, and has $9,000,000 in equity capital.The tax rate is 35%.What is the company's cost of equity capital?
A)6.00%
B)6.25%
C)6.50%
D)9.25%
E)12.00%

Question

Use the information below to answer the following question(s).Brandorf Company has two sources of funds: long term debt with a market and book value of $9 million issued at an interest rate of 10 percent; and, equity capital that has a market value of $6 million (book value of $2 million).The cost of equity capital is 5 percent, while the tax rate is 30 percent.Brandorf Company has profit centres in the following locations with the following data:
 
-A company's weighted-average cost of capital [WACC] was 9.6% last year.The company has $6,000,000 of bonds payable (its only debt)with a 9.25% coupon, and has $9,000,000 in equity capital.The tax rate is 35%.What is the company's cost of equity capital?
A)6.00% 
B)6.25% 
C)6.50% 
D)9.25% 
E)12.00%

Quizplus · Accepted Answer

The WACC is calculated as: WACC = (E/V) * Re + (D/V) * Rd * (1-Tc). Given WACC = 9.6%, Rd = 9.25%, Tc = 35%, E = $9,000,000, D = $6,000,000, V = $15,000,000. Solving for Re (cost of equity): 9.6% = (9/15) * Re + (6/15) * 9.25% * (1-0.35). Re = 12.00%.

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