Suppose that Topstone Industries has a cost of equity of 14% and a cost of debt of 9%. If the target debt/equity ratio is 75%, and the tax rate is 34%, what is Topstone's weighted average cost of capital (WACC)?

Question

Quizplus · Accepted Answer

The WACC is calculated using the formula: WACC = E/V * Re + D/V * Rd * (1-Tc). Here, E/V = 1/(1+0.75) = 0.5714, D/V = 0.75/(1+0.75) = 0.4286, Re = 14%, Rd = 9%, Tc = 34%. Plugging these into the formula gives WACC = 0.5714 * 14% + 0.4286 * 9% * (1-0.34) = 10.5%.

Suppose That Topstone Industries Has a Cost of Equity of 14