Olden Company has a tax rate of 40 percent. Information for the company is as follows: $$\begin{array} { l r c }
& \text { Amount } & \text { After-tax Cost } \
\text { Mortgage bonds }& \$ 1,000,000 & 0.048 \
\text { Unsecured bonds } & 3,000,000 & 0.050 \
\text { Common stock } & 6,000,000 & 0.150
\end{array}$$ What is the weighted average cost of capital?
A)0.0827
B)0.2480
C)0.1098
D)0.0366

Question

Olden Company has a tax rate of 40 percent. Information for the company is as follows: $$\begin{array} { l r c } 
 & \text { Amount } & \text { After-tax Cost } \
\text { Mortgage bonds }& \$ 1,000,000 & 0.048 \
\text { Unsecured bonds } & 3,000,000 & 0.050 \
\text { Common stock } & 6,000,000 & 0.150
\end{array}$$ What is the weighted average cost of capital?
A)0.0827
B)0.2480
C)0.1098
D)0.0366

Quizplus · Accepted Answer

To calculate the weighted average cost of capital (WACC), we first need to determine the total capital, which is the sum of mortgage bonds, unsecured bonds, and common stock: $1,000,000 + $3,000,000 + $6,000,000 = $10,000,000. Then, we calculate the weight of each type of capital by dividing the amount of each by the total capital and multiply by the after-tax cost:- Mortgage bonds: ($1,000,000 / $10,000,000) * 0.048 = 0.0048- Unsecured bonds: ($3,000,000 / $10,000,000) * 0.050 = 0.015- Common stock: ($6,000,000 / $10,000,000) * 0.150 = 0.090Adding these together gives the WACC: 0.0048 + 0.015 + 0.090 = 0.1098.

Olden Company Has a Tax Rate of 40 Percent What Is the Weighted Average Cost of Capital? A)0

Olden Company Has a Tax Rate of 40 Percent What Is the Weighted Average Cost of Capital?
A)0