Calculate the after-tax WACC for Kareem

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Reference no: EM132904319

Problem - Weighted Average Cost of Capital - Kareem Construction Company has the following amounts of interest-bearing debt and common equity capital:

FINANCING SOURCE

DOLLAR AMOUNT

INTEREST RATE

COST OF CAPITAL

Short-term loan

$200,000

12%


Long-term loan

$200,000

14%


Equity capital

$600,000


22%

Kareem Construction is in the 30 percent average tax bracket.

Required -

A. Calculate the after-tax WACC for Kareem.

B. Show how Kareem's WACC would change if the tax rate dropped to 25 percent and the estimated cost of equity capital were based on a risk-free rate of 7 percent, a market risk premium of 8 percent, and a systematic risk measure or beta of 2.0.

Reference no: EM132904319

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