Century Aluminums Co. has the following amounts of interest-bearing debt and com
ID: 2614040 • Letter: C
Question
Century Aluminums Co. has the following amounts of interest-bearing debt and common equity capital:
Financing Dollar Interest
Source Amount Rate
Short-Term Loan $350,000 10%
Long-Term Loan $50,000 18%
Equity Capital $600,000
Century Aluminums Co. is in the 30 percent average tax bracket. The firm’s beta is 2.5, inflation rate is 2%, risk free rate is 5% and the market return is 15%. What is the after-tax weighted average cost of capital (WACC) for Century Aluminums Co.?
Explanation / Answer
COMPONENT COST OF CAPITAL: After tax cost of Short term loan = 10*(1-0.30) = 7.00 After tax cost of Long term loan = 18*(1-0.30) = 12.60 Cost of equity (CAPM) = Risk free rate+beta*(Market return-Risk free rate) = 5+2*(15-5) = 25.00 WACC: WACC is the weighted average of the component cost of capital, the weights being the ratio of each source of capital to the total capital. = 7*3.5/10+12.6*0.5/10+25*6/10 = 18.08