Qantas is discussing new ways to recapitalise and raise additional capital. Its current capital structure has a 20% weight in ordinary shares, 10% in preference shares and 70% in debt. The cost of equity capital is 14%, the cost of preference shares is 10%, and the pre-tax cost of debt is 9%. What is the weighted average cost of capital for Qantas if its marginal tax rate is 30%?

Question

Quizplus · Accepted Answer

First, we need to find the weights of the different sources of capital:
Weight of equity = 20%
Weight of preference shares = 10%
Weight of debt = 70%
Next, we can use the WACC formula to find the weighted average cost of capital:
WACC = (E/V) * Re + (P/V) * Rp + (D/V) * Rd * (1 - T)
Where:
E/V = weight of equity
Re = cost of equity
P/V = weight of preference shares
Rp = cost of preference shares
D/V = weight of debt
Rd = pre-tax cost of debt
T = marginal tax rate

Plugging in the values, we get:
WACC = (0.2 * 0.14) + (0.1 * 0.1) + (0.7 * 0.09 * (1-0.3))
WACC = 0.028 + 0.01 + 0.0441
WACC = 0.0821 or 8.21%

Therefore, the best choice is (C), which is the only option that matches this result.

Qantas Is Discussing New Ways to Recapitalise and Raise Additional