The Abco Co. maintains a debt-equity ratio of.70 and has a tax rate of 39 %. The firm does not issue preferred stock. The cost of equity is 12 % and the after-tax cost of debt is 5 %. What is Abco's weighted average cost of capital?

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Quizplus · Accepted Answer

The WACC is calculated using the formula: WACC = (E/V) * Re + (D/V) * Rd * (1-Tc), where E is equity, D is debt, V is total value (E+D), Re is cost of equity, Rd is cost of debt, and Tc is tax rate. With a debt-equity ratio of 0.70, D/E = 0.70, so D/V = 0.70/1.70 and E/V = 1/1.70. Plugging in the values: WACC = (1/1.70) * 12% + (0.70/1.70) * 5% = 9.1%.