 # a) The cost of capital before tax. Given: A firm has 40000 shares whose current price is $80.75. rocedwrp 2021-08-20 Answered a) The cost of capital before tax. Given: A firm has 40000 shares whose current price is$80.75.
Those stockholders expect a return of $15\mathrm{%}$.
The firm has a 2 year loan of $900000 at $6.4\mathrm{%}$. It has issued 12,500 bonds with a face value of 1000. Time period for maturity is 15 years. The semiannual interest rate is $6\mathrm{%}$. The current price is$1090.
b) The cost of capital after tax.

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a) Calculation:
$\text{Equity}=\left(\text{Shares}\right)×\left(\text{Price of shares}\right)$ ...... (I)
Substitute 40000 for shares, and $80.75 for Price of shares in Equation (I). $Equi $=\mathrm{}3230000$ Calculate the total bond fund. $\text{Bond fund}=\left(\text{Number of bond}\right)×\left(\text{Bond value}\right)$ ......(II) Substitute 12,500 for number of bonds, and$1090 for bond value in Equation (II).
Bond fund $=\mathrm{}12500×\mathrm{}1090$
$=\mathrm{}13625000$
Calculate the total fund.
Total fund $=\mathrm{}3230000+\mathrm{}9000000+\mathrm{}13625000$
$=\mathrm{}17755000$
Calculate the cost of capital before tax.
$\begin{array}{|ccccc|}\hline Particulars& Fund\left(A\right)& Weight\left(B\right)\left(\frac{A}{17755000}\right)& Rate\left(C\right)& \text{Weighted Rate}\left(B×C\right)\\ Equity& 3230000& 0.18& 15\mathrm{%}& 2.73\\ Bonds& 13625000& 0.77& 6\mathrm{%}& 0.32\\ Loan& 900000& 0.05& 6.4\mathrm{%}& 4.60\\ Total& 17755000& & & 7.66\mathrm{%}\\ \hline\end{array}$
Conclusion:
Therefore, the cost of capital before tax is, $6.50\mathrm{%}$.
b) Calculate the rate for the loan.
Rate $=6.4\mathrm{%}\left(1-0.40\right)$
$=3.84\mathrm{%}$
Calculate the interest rate on the bonds.
Rate $=6\mathrm{%}\left(1-0.40\right)$
$=3.6\mathrm{%}$ Calculate the interest rate on Equity.
Rate $=15\mathrm{%}\left(1-0.40\right)$
$=9\mathrm{%}$
Calculate the cost of capital after tax.
$\begin{array}{|ccccc|}\hline Particulars& Fund\left(A\right)& Weight\left(B\right)\left(\frac{A}{17755000}\right)& Rate\left(C\right)& \text{Weighted Rate}\left(B×C\right)\\ Equity& 3230000& 0.18& 9\mathrm{%}& 1.62\\ Bonds& 13625000& 0.77& 3.6\mathrm{%}& 2.772\\ Loan& 900000& 0.05& 3.84\mathrm{%}& 0.192\\ Total& 17755000& & & 4.584\mathrm{%}\\ \hline\end{array}$
Conclusion:
Therefore, the cost of capital after tax is, $4.584\mathrm{%}$.