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? (two decimal places only)
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? (two decimal places only)
A) 6.00% 
B) 6.25% 
C) 6.50% 
D) 9.25% 
E) 12.00%

Quizplus · Accepted Answer

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

Use the Information Below to Answer the Following Question(s)