A firm has debt of $8,000, a leveraged value of $18,800, a cost of debt of 8.75%, a cost of equity of 13%, and a tax rate of 35%. What is the firm's weighted average cost of capital?
A) 9.89%
B) 10.33%
C) 10.69%
D) 11.19%
E) 12.48%

Question

Quizplus · Accepted Answer

The correct answer is A because the weighted average cost of capital (WACC) is calculated as follows:WACC = (E/V) * Re + (D/V) * Rd * (1 - T)where:E = market value of equityV = total value of the firmRe = cost of equityD = market value of debtRd = cost of debtT = tax rateIn this case, we have:E = $18,800 - $8,000 = $10,800V = $18,800Re = 13%D = $8,000Rd = 8.75%T = 35%Plugging these values into the formula, we get:WACC = (10,800/18,800) * 13% + (8,000/18,800) * 8.75% * (1 - 35%)WACC = 0.5745 * 13% + 0.4255 * 8.75% * 0.65WACC = 7.46% + 2.44%WACC = 9.89%

A Firm Has Debt of $8,000, a Leveraged Value of $18,800