Rumolt Motors has 30 million shares outstanding with a price of $15 per share. In addition, Rumolt 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%.
a. What is Rumolt’s pretax weighted average cost of capital?
b. If Rumolt’s corporate tax rate is 35%, what is its after-tax weighted average cost of capital?