ABC Company’s cost of equity is 18%, its before-tax cost of debt is 8%, and its corporate tax rate is 40%. Given the following balance sheet, calculate the after-tax weighted-average cost of capital.Assets LiabilitiesCashP 100 Accounts payableP 200Accounts Receivable400 Accrued taxes due200Inventories200 Long-term debt400Plant & equipment1,300 Equity1,200 P2,000 P2,000

After tax weighted average cost of capital = (ke * We/V) + (kd * Wd/V), where, ke = Cost of equity…

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after-tax weighted-average cost of capital

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter12: Balanced Scorecard And Other Performance Measures

Section: Chapter Questions

Problem 7EA: Assume Skyler Industries has debt of $4,500,000 with a cost of capital of 7.5% and equity of...

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Question

ABC Company’s cost of equity is 18%, its before-tax cost of debt is 8%, and its corporate tax rate is 40%. Given the following balance sheet, calculate the after-tax weighted-average cost of capital.

Assets		Liabilities
Cash	P 100		Accounts payable	P 200
Accounts Receivable	400		Accrued taxes due	200
Inventories	200		Long-term debt	400
Plant & equipment	1,300		Equity	1,200
	P2,000			P2,000

Definition Definition Amount of return a company generally pays to its equity investors. The cost of equity represents the compensation required by the market in lieu of owning the asset firm and simultaneously bearing the risk of ownership.

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