Felix Filter maintains a debt-equity ratio of 0.6.The cost of equity for Richardson Corp.is 16%, the cost of debt is 11% and the marginal tax rate is 30%.What is the weighted average cost of capital?

Question

Quizplus · Accepted Answer

First, we need to calculate the weight of equity and debt:
Weight of equity = 1 - Debt-equity ratio = 1 - 0.6 = 0.4
Weight of debt = Debt-equity ratio = 0.6
Next, we can calculate the weighted average cost of capital (WACC) using the following formula:
WACC = (Weight of equity x Cost of equity) + (Weight of debt x Cost of debt x (1 - Marginal tax rate))

WACC = (0.4 x 16%) + (0.6 x 11% x (1 - 30%))
WACC = 6.4% + 4.62%
WACC = 11.02%

Therefore, the best choice is C because it is the closest option to the calculated WACC.

Felix Filter Maintains a Debt-Equity Ratio of 0