A firm with a 40% marginal tax rate has a capital structure of $60,000,000 in debt and $140,000,000 in equity. What is the firm's weighted cost of capital if the marginal pretax cost of debt is 12%, the firm's average pretax cost of debt outstanding is 8%, and the cost of equity is 14.5%?

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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 equity, V is total value (equity + debt), Re is cost of equity, D is debt, Rd is cost of debt, and Tc is the tax rate. Here, E = $140M, D = $60M, V = $200M, Re = 14.5%, Rd = 12%, and Tc = 40%. WACC = ($140M/$200M * 14.5%) + ($60M/$200M * 12% * (1-0.4)) = 12.31%.

A Firm with a 40% Marginal Tax Rate Has a Capital