Your firm has earnings before interest and taxes of $210,000. Both the book and the market value of debt is $500,000. Your unlevered cost of equity is 9% while your cost of debt is 7%. The tax rate is 35%. What is your weighted average cost of capital?

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The weighted average cost of capital (WACC) is calculated as follows: 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 corporate tax rate. First, we need to calculate the firm's equity value (E). Since we have EBIT, we can calculate the firm's net income after taxes and interest, which is not directly needed for WACC but helps in understanding the firm's profitability. The firm's value (V) is not given directly, but we can calculate it using the unlevered cost of equity as a proxy for the firm's overall required return in an unlevered state. However, in this case, we don't need to calculate the firm's equity value directly from the given information to find WACC. We use the given cost of debt, cost of equity, and the tax rate directly in the WACC formula. Assuming the market value of debt (D) is $500,000 and the total value of the firm is the sum of its debt and equity, we can calculate the proportion of debt and equity in the firm's capital structure. However, we are not given the market value of equity directly, which complicates direct calculation without making assumptions. Given the information, we focus on the components we know: the cost of debt, the tax rate, and the unlevered cost of equity. The correct approach involves recognizing that without the market value of equity, we must rely on the given rates and the tax shield benefit of debt. The WACC formula integrates these elements, accounting for the tax benefit of debt financing. The calculation simplifies to a focus on the given rates and the tax impact, leading to the correct selection based on the provided options and the standard WACC formula application. The correct answer reflects the weighted costs of debt and equity, adjusted for the tax benefit of debt.

Your Firm Has Earnings Before Interest and Taxes of $210,000