Your firm has earnings before interest and taxes of $160,000. Both the book and the market value of debt is $300,000. Your unlevered cost of equity is 12% while your cost of debt is 8%. The tax rate is 35%. What is your weighted average cost of capital?
A) 10.72%
B) 10.91%
C) 10.98%
D) 11.06%
E) 11.23%

Question

Quizplus · Accepted Answer

The weighted average cost of capital (WACC) is calculated using the formula: WACC = (E/V) * Re + (D/V) * Rd * (1-Tc), where E is the market value of equity, D is the market value of debt, V is the total value (E + D), Re is the cost of equity, Rd is the cost of debt, and Tc is the tax rate. Here, E = $1,000,000 (calculated from EBIT and unlevered cost of equity), D = $300,000, V = $1,300,000, Re = 12%, Rd = 8%, and Tc = 35%. Plugging these values into the formula gives a WACC of approximately 10.72%.

Your Firm Has Earnings Before Interest and Taxes of $160,000