Report stockholders\' equity on the company\'s December 31, 2011 Daa Problem 3-2
ID: 2542662 • Letter: R
Question
Report stockholders' equity on the company's December 31, 2011 Daa Problem 3-2 Subtle Edge, Inc. presents the following excerpts from its December 31, 2017 balance sheet: Current Liabilities: Notes payable, 8% Long-term Liabilities: Bonds payable, 10% Shareholders' Equity Common stock, par Additional paid-in-capital, common stock Total contributed capital Retained earnings S 200,000 1,000,000 50,000 350,000 400,000 250,000 650,000 Total shareholders' equity The accounting department also conveys the following information: Risk-free rate of return-_ 3% Risk premium-4.05% Tax rate-30% Required: Compute Subtle Edge's weighted average cost of capital.Explanation / Answer
Solution:
Cost of notes payable (Kn) = Interest rate (1-Tax) = 8% (1-0.30) = 5.60%
Cost of long term debts (Kd) = Interest rate (1-Tax) = 10% (1-0.30) = 7%
Cost of Equity (Ke) = Risk free return + risk permium = 3% + 4.05% = 7.05%
Weighted average cost of capital (WACC) = Kn*Wn + Kd*Wd + Ke*We
= (5.60% * 2/18.50) + (7% * 10/18.50) + (7.05% * 6.5/18.50) = 6.87%