Let's solve this step-by-step: --- ### **Step 1: Calculate After-Tax Cost of Debt** #### **a) 15-year Bonds (YTM = 6%, Amount = $250,000)** After-tax cost of debt = YTM × (1 - Tax Rate) = 6% × (1 - 0.25) = 6% × 0.75 = **4.50%** #### **b) 8-year Loan (APR = 7%, Amount = $150,000)** After-tax cost of debt = APR × (1 - Tax Rate) = 7% × (1 - 0.25) = 7% × 0.75 = **5.25%** --- ### **Step 2: Calculate Proportion of Each Component** Total capital = $250,000 (bonds) + $150,000 (loan) + $400,000 (stock) + $200,000 (retained earnings) = $1,000,000 - Bonds: $250,000 / $1,000,000 = **0.25** - Loan: $150,000 / $1,000,000 = **0.15** - Equity (common stock + retained earnings): ($400,000 + $200,000) / $1,000,000 = **0.60** --- ### **Step 3: Weighted Average Cost of Capital (WACC)** \[ \text{WACC} = (w_1 \cdot r_1) + (w_2 \cdot r_2) + (w_3 \cdot r_3) \] Where: - \( w_1 \) = weight of bonds = 0.25, \( r_1 \) = after-tax cost of bonds = 4.5% - \( w_2 \) = weight of loan = 0.15, \( r_2 \) = after-tax cost of loan = 5.25% - \( w_3 \) = weight of equity = 0.60, \( r_3 \) = cost of equity = 14% \[ \text{WACC} = (0.25 \times 4.5\%) + (0.15 \times 5.25\%) + (0.60 \times 14\%) \] \[ = 1.125\% + 0.7875\% + 8.40\% \] \[ = 10.31\% \] --- ### **Final Answers:** **ABC's after tax cost of debt is:** - For bonds: **4.50%** - For loan: **5.25%** **ABC's after tax weighted average cost of capital is:** **10.31%** --- **Summary Table:** | Source | Amount | After-tax Cost | Weight | Weighted Cost (%) | |------------------|-----------|----------------|---------|-------------------| | 15-year Bonds | $250,000 | 4.50% | 0.25 | 1.125 | | 8-year Loan | $150,000 | 5.25% | 0.15 | 0.7875 | | Equity | $600,000 | 14% | 0.60 | 8.40 | | **Total** | $1,000,000| | 1.00 | **10.31** | --- If you need the answers in the exact boxes: - **ABC's after tax cost of debt is**: 4.50% (bonds), 5.25% (loan) - **ABC's after tax weighted average cost of capital is**: 10.31%