The Granite Paving Company has a debt equity ratio of 1.5. The before-tax cost of debt is
11% and the unlevered equity is 14%. Calculate the weighted average cost of capital for the firm if the tax rate is 33%.

Question

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 the cost of equity, Rd is the cost of debt, and Tc is the tax rate. With a debt-equity ratio of 1.5, D/E = 1.5, so D = 1.5E. Therefore, V = E + D = 2.5E. The proportions are E/V = 1/2.5 and D/V = 1.5/2.5. Substituting the given values: WACC = (1/2.5) * 14% + (1.5/2.5) * 11% * (1-0.33) = 11.22%.

The Granite Paving Company Has a Debt Equity Ratio of 1.5