Ronnie's Comics has found that its cost of common equity capital is 15 percent and its cost of debt capital is 12 percent. The firm is financed with $250,000,000 of common shares (market value) and $750,000,000 of debt. What is the after-tax weighted average cost of capital for Ronnie's, if it is subject to a 35 percent marginal tax rate?

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Quizplus · Accepted Answer

The after-tax weighted average cost of capital (WACC) is calculated using the formula: WACC = (E/V * Re) + (D/V * Rd * (1-Tc)), where E is the market value of equity, V is the total market value of the firm's financing (equity + debt), Re is the cost of equity, D is the market value of debt, Rd is the cost of debt, and Tc is the tax rate. Plugging in the values: WACC = ($250M/$1,000M * 15%) + ($750M/$1,000M * 12% * (1-0.35)) = 3.75% + 5.85% = 9.6%.

Ronnie's Comics Has Found That Its Cost of Common Equity