Calculate the After-Tax Weighted Average Cost of Capital of Marine plc

What is the after-tax weighted average cost of capital of Marine plc?

Based on the given data, how can we calculate the after-tax weighted average cost of capital for Marine plc?

Answer:

The after-tax weighted average cost of capital (WACC) of Marine plc is calculated to be 10.14%.

Marine plc, a multi-national company manufacturing boats and scuba diving accessories, has various financial components that contribute to its after-tax weighted average cost of capital (WACC). The WACC is an important metric that helps companies evaluate the cost of financing their operations through equity and debt.

In order to calculate the after-tax WACC of Marine plc, we first need to determine the different elements of the formula. These include the market values of equity and debt, the cost of equity, the cost of debt, and the corporate tax rate.

The market value of the company's equity is calculated by multiplying the number of ordinary shares issued by the market value per share. In this case, it amounts to RM14,000,000. Additionally, the market value of the preferred shares is RM4,000,000. Therefore, the total market value of capital (V) for Marine plc is RM18,000,000.

The market value of the company's debt is RM200,000, based on the bonds with a total book value of RM2 million. The cost of equity (Re) is determined using the formula Rf + β (Rm – Rf). The cost of debt (Rd) is given as 8%, and the corporate tax rate (Tc) is 30%.

After considering the calculations for the cost of equity, debt, and preferred shares, we can apply the WACC formula: WACC = (E / V × Re) + ((D / V × Rd) × (1 - Tc)). By substituting the values, we arrive at 10.14% as the after-tax weighted average cost of capital for Marine plc.

Understanding the WACC is vital for companies like Marine plc to make informed decisions about their capital structure and financing options. By knowing the cost of capital, businesses can evaluate potential investment projects and determine the most efficient way to raise funds.