Question textRio Tinto has $120 million in the capital, of which shareholders contribute 30%. Shareholders' required rate of return is 10% p.a. Creditors charge 6% p.a. interest. Rio Tinto's Weighted Average Cost of Capital is Answer 1 Question 9[input]% (round to 2 d.p)

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BlackTom AI · Accepted Answer

First, separate the capital structure into equity and debt using the given information. The total capital is 120 million, and shareholders contribute 30%, so Equity (E) = 0.30 × 120 = 36 million. Debt (D) then makes up the remaining 70%, so D = 0.70 × 120 = 84 million. The total value V is 120 million, which is E + D.

Next, apply the Weighted Average Cost of Capital (WACC) formula when taxes are not specified: WACC = (E/V) × Re + (D/V) × Rd. Here, Re is the cost of equity (10%), and Rd is the cost of debt (6%). Plugging in the weights: (E/V) = 36/120 = 0.30, (D/V) = 84/120 = 0.70.

Compute each term: (E/V) × Re = 0.30 × 0.10 = 0.03 (3%), and (D/V) × Rd = 0.70 × 0.06 = 0.042 (4.2%).

Add them together: WACC = 0.03 + 0.042 = 0.072, which as a percentage is 7.2%. Rounding to two decimal places yields 7.20%.

Notes on alternative assumptions: If a tax rate were provided and included (i.e., Rd × (1 − Tax rate)), the debt portion would be reduced by the tax shield. Since no tax rate is given in the problem, the straightforward calculation uses Rd = 6% without tax adjustment. If weights were to be based on market values or if the debt cost or equity cost differed, the result would change accordingly.

MCD2170 Foundations of Finance - Trimester 3 - 2025

Question textRio Tinto has $120 million in the capital, of which shareholders contribute 30%. Shareholders' required rate of return is 10% p.a. Creditors charge 6% p.a. interest. Rio Tinto's Weighted Average Cost of Capital is Answer 1 Question 9[input]% (round to 2 d.p)

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