Qantas is discussing new ways to recapitalise the firm and raise additional capital. Its current capital structure has a 10% weight in ordinary shares, 20% in preference shares, and 70% in debt. The cost of equity capital is 15%, the cost of preference shares is 10%, and the pretax cost of debt is 8%. What is the weighted average cost of capital for Qantas if its marginal tax rate is 30%?

Question

Quizplus · Accepted Answer

To find the weighted average cost of capital (WACC), we must calculate the cost of each component of capital (equity, preference shares, debt) and weight them by their proportions in the capital structure.

Cost of equity capital = 15%
Cost of preference shares = 10%
Pretax cost of debt = 8%
Marginal tax rate = 30%

Using the formula: WACC = (proportion of equity x cost of equity) + (proportion of preference shares x cost of preference shares) + (proportion of debt x after-tax cost of debt)

WACC = (0.10 x 0.15) + (0.20 x 0.10) + (0.70 x (0.08 x (1 - 0.30)))

WACC = 0.0145 + 0.02 + 0.0406

WACC = 0.0742 or 7.42% (rounded to two decimal places)

Therefore, the best choice is B.

Qantas Is Discussing New Ways to Recapitalise the Firm and Raise