1. Calculate the company's after-tax cost of borrowing. It is 9.932%
2. Calculate the company's weighted average cost of capital. It is 11.613%.
Sources Amounts
Trade and other payables ......... $200,000
Short-term borrowings .......... 250,000
Mortgage ................ 500,000
Long-term borrowings ........... 250,000
Share capital .............. 300,000
Retained earnings ............ 800,000
The before-tax bank charges are 11.0% for the short-term borrowings, 10.0% for the long-term borrowings, and 10.5% on the mortgage. The shareholders expect to earn 16%. Assume that the company’s income tax rate is 50%.