Problem: Mike's Motors has 30 million shares outstanding with a price of $15 per share. In addition, Mike has issued bonds with a total current market value of $150 million. Suppose Rumolt's equity cost of capital is 10%, and its debt cost of capital is 5%.
Q1. What is Mike's pretax weighted average cost of capital?
Pretax weighted average cost of capital =
Q2. If Mike's corporate tax rate is 35%, what is its after-tax weighted average cost of capital?
After-tax weighted average cost of capital =