What I the before-tax cost of 8.4% and the firm uses 35% what is QM's weighed average cost of capital.
The target capital structure for QM Industries is 38%
To calculate QM's weighted average cost of capital (WACC), you need to understand the components that make up this metric. WACC represents the average rate of return a company must earn on its investments to maintain its current value. It considers the cost of both equity and debt capital, taking into account the weightage of each component based on the firm's capital structure.
To compute the WACC, follow these steps:
1. Determine the cost of debt:
- The before-tax cost of debt is given as 8.4%. This rate represents the firm's borrowing cost before considering taxes.
- However, since you've mentioned that the firm uses a 35% tax rate, we need to adjust the before-tax cost accordingly. By subtracting the tax shield effect, you can calculate the after-tax cost of debt.
- To find the after-tax cost of debt, multiply the before-tax cost (8.4%) by a factor (1 - tax rate, 0.65 in this case).
- After-tax cost of debt = 8.4% * (1 - 0.35).
2. Determine the cost of equity:
- The cost of equity represents the required return on equity capital investors demand for holding the company's stock.
- This figure is not provided in your question, so we can't calculate the WACC without it. Typically, it is estimated using methods like the capital asset pricing model (CAPM) or the dividend discount model (DDM) based on the firm's risk and market factors.
3. Determine the weights of debt and equity:
- The weights given the proportion of each component in the company's capital structure and are typically represented as a percentage.
- The weightage of debt (Wd) and equity (We) can be found by dividing the total market value of each component by the sum of the market values of both debt and equity capital.
4. Calculate WACC:
- WACC is calculated as the weighted average of the cost of debt and cost of equity, using the respective weights assigned to each component.
- The formula for WACC is: WACC = (Wd * Rd) + (We * Re), where Rd represents the after-tax cost of debt and Re represents the cost of equity.
Given that we have the cost of debt (after-tax) at step 1 and the cost of equity is missing, we are unable to provide you with the specific value of QM's WACC. Please provide the cost of equity, along with any other necessary information, for a more accurate calculation.