Young Company has a tax rate of 40 per cent. Information for the company is as follows: $\begin{array}{lrc}
& \text { Amount } & \text { After-tax Cost } \
\text { Mortgage bonds } & £ 1,000,000 & 0.048 \
\text { Unsecured bonds } & 3,000,000 & 0.050 \
\text { Common stock (ordinary share capital) }& 6,000,000 & 0.150
\end{array}$ What is the weighted cost of capital?

Question

Young Company has a tax rate of 40 per cent. Information for the company is as follows: $\begin{array}{lrc}
& \text { Amount } & \text { After-tax Cost } \
 \text { Mortgage bonds } & £ 1,000,000 & 0.048 \
\text { Unsecured bonds } & 3,000,000 & 0.050 \
\text { Common stock (ordinary share capital) }& 6,000,000 & 0.150
\end{array}$ What is the weighted cost of capital?

Quizplus · Accepted Answer

The weighted cost of capital (WACC) is calculated by multiplying the cost of each capital component by its proportional weight and then summing the results. Here's the calculation:1. Calculate the total capital: £1,000,000 (mortgage bonds) + £3,000,000 (unsecured bonds) + £6,000,000 (common stock) = £10,000,000.2. Calculate the weight of each component:   - Mortgage bonds: £1,000,000 / £10,000,000 = 0.1   - Unsecured bonds: £3,000,000 / £10,000,000 = 0.3   - Common stock: £6,000,000 / £10,000,000 = 0.63. Multiply each cost by its weight and sum:   - Mortgage bonds: 0.048 * 0.1 = 0.0048   - Unsecured bonds: 0.050 * 0.3 = 0.015   - Common stock: 0.150 * 0.6 = 0.094. Sum: 0.0048 + 0.015 + 0.09 = 0.1098Therefore, the weighted cost of capital is 0.1098 or 10.98%.

Young Company Has a Tax Rate of 40 Per Cent