A firm requires an investment of $20,000 and borrows $10,000 at 8%. If the return on equity is 20%, what is the firm's pretax WACC?

Question

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The firm's pretax WACC is calculated by taking the weighted average of the cost of equity and the cost of debt. The cost of equity is 20%, and the cost of debt is 8%. The weights are based on the proportion of equity and debt in the total investment. The firm has $10,000 in equity and $10,000 in debt, so the weights are 0.5 for both. The pretax WACC is (0.5 * 20%) + (0.5 * 8%) = 14%.

A Firm Requires an Investment of $20,000 and Borrows $10,000