Weighted average cost of capital at new capital structure

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Reference no: EM13868529

Union Brick Inc. (UBI) has a total market value of $200 million, consisting of 2 million shares of common stock selling for $50 per share and $100 million of 10 percent perpetual bonds currently selling at par. UBI pays out all earnings as dividends, and its marginal tax rate is 40 percent. The firm’s earnings before interest and taxes (EBIT) are $30 million. Management is considering increasing UBI's debt until its capital structure has 60 percent debt, based on market values. The additional funds will be used to repurchase stock at the new equilibrium price. At the new capital structure, UBI's cost of debt is estimated at 13.182 percent and its cost of equity is estimated to be 10 percent.

What is UBI's weighted average cost of capital (in percentages, i.e., 9% instead of 0.09) at its new capital structure?

Reference no: EM13868529

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