The market value of DRK Inc.'s debt is $200 million and the total market value of the firm is $600 million. The cost of equity is 15%, the cost of debt is 8%, and the tax rate is 34%. What is this firm's WACC?

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 the firm's equity, D is the market value of the firm's debt, V is the total market value of the firm (E + D), Re is the cost of equity, Rd is the cost of debt, and Tc is the corporate tax rate. Given that the market value of equity (E) is $400 million (calculated as total firm value $600 million - debt $200 million), the market value of debt (D) is $200 million, and the total market value (V) is $600 million, the cost of equity (Re) is 15%, the cost of debt (Rd) is 8%, and the tax rate (Tc) is 34%, the WACC can be calculated as follows: WACC = ($400M/$600M) * 15% + ($200M/$600M) * 8% * (1 - 34%) = 0.6667 * 15% + 0.3333 * 8% * 0.66 = 10% + 1.76% = 11.76%.

The Market Value of DRK Inc