The Nutrex Corporation wants to calculate its weighted average cost of capital. Its target capital structure weights are 40 percent long-term debt and 60 percent common equity. The before-tax cost of debt is estimated to be 10 percent and the company is in the 40 percent tax bracket. The current risk-free interest rate is 8 percent on Treasury bills. The expected return on the market is 13 percent and the firm’s stock beta is 1.8.
a. What is Nutrex ‘s cost of debt?
8.The Nutrex Corporation wants to calculate its weighted average cost of capital. Its target capital structure weights are 40 percent long-term debt and 60 percent common equity. The before-tax cost of debt is estimated to be 10 percent and the company is in the 40 percent tax bracket. The current risk-free interest rate is 8 percent on Treasury bills. The expected return on the market is 13 percent and the firm's stock beta is 1.8.
a.
What is Nutrex's cost of debt?
b.
Estimate Nutrex's expected return on common equity using the security market line.
c.
Calculate the after-tax weighted average cost of capital.
To calculate Nutrex's cost of debt, we can use the formula:
Cost of Debt = Before-tax Cost of Debt * (1 - Tax Rate)
Given that the before-tax cost of debt is 10% and the tax rate is 40%, we can substitute these values into the formula:
Cost of Debt = 10% * (1 - 40%)
Cost of Debt = 10% * (1 - 0.4)
Cost of Debt = 10% * 0.6
Cost of Debt = 6%
Therefore, Nutrex's cost of debt is 6%.