Western Australian Mining Pty Ltd,an Australian listed company,has 5 000 000 ordinary shares outstanding and the current market price per share is $6.50.The required rate of return for the ordinary shares is estimated to be 16%.They have issued bonds with a face value of $15 000 000 but the current market value based on a yield to maturity of 9.5% is $14 950 233.If the corporate tax rate is 30% what is the weighted average cost of capital assuming a classical tax system?

Question

Quizplus · Accepted Answer

The correct answer is A because the weighted average cost of capital is calculated as follows:WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc)where:E = market value of equityV = total value of the firmRe = required rate of return on equityD = market value of debtRd = required rate of return on debtTc = corporate tax rateIn this case, we have:E = 5,000,000 * $6.50 = $32,500,000V = $32,500,000 + $14,950,233 = $47,450,233Re = 16%D = $14,950,233Rd = 9.5%Tc = 30%Plugging these values into the formula, we get:WACC = (32,500,000/47,450,233) * 16% + (14,950,233/47,450,233) * 9.5% * (1 - 30%)= 13.06%

Western Australian Mining Pty Ltd,an Australian Listed Company,has 5 000