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2 Jul 2019
Part I. Given the tax rate of 40% of this corporation, calculate its after-tax weighted average cost of capital (WACC) for Duke Corporation.
Table: the before-tax weighted average cost of capital (WACC) for Duke Corporation
Source of Capital Weight (1) Cost (2) Weighted Cost (1) X (2) Long-Term Debt .4 5.6% 2.24% Preferred Stock .1 10.6% 1.06% Common Stock Equity .5 13% 6.5% Totals 1 9.8%
Part II. Answer true, false or uncertain and explain briefly on the following statement. "the after-tax wacc cannot ever be higher than the before-tax wacc."
Part I. Given the tax rate of 40% of this corporation, calculate its after-tax weighted average cost of capital (WACC) for Duke Corporation.
Table: the before-tax weighted average cost of capital (WACC) for Duke Corporation
| Source of Capital | Weight (1) | Cost (2) | Weighted Cost (1) X (2) |
|---|---|---|---|
| Long-Term Debt | .4 | 5.6% | 2.24% |
| Preferred Stock | .1 | 10.6% | 1.06% |
| Common Stock Equity | .5 | 13% | 6.5% |
| Totals | 1 | 9.8% |
Part II. Answer true, false or uncertain and explain briefly on the following statement. "the after-tax wacc cannot ever be higher than the before-tax wacc."
Bunny GreenfelderLv2
5 Jul 2019
Related questions
Please see chart below. I feel like WACC of 11.90 is wrong. Where is the 5.5% "cost of debt before tax" coming from? If from equity because it is taxable, how would it be calculated? Also, It seems like the calculation is incomplete. would WAAC be 11.9% x 5.5% x 1-.3? Is WAAC really 4.58%?
How do you find the WACC?
| Statement showing computation of WACC | |||
| Particulars | Weight | Cost of Capital | Weighted Cost of capital |
| Equity or common stock | 0.5500 | 18.000% | 9.90% |
| Preferred Stock | 0.0500 | 9.200% | 0.46% |
| Debt | 0.4000 | 3.85% | 1.54% |
| 1.00 | 11.90% | ||
| Thus WACC is 11.90% | |||
| Cost of debt before tax | 5.5% | ||
| Tax Rate | 30% | ||
| Cost of debt after tax(5.5(1-.3) | 3.85% | ||
