Your ﬁrm has earnings before interest and taxes of $160,000. Both the book and the market value of debt is $300,000. Your unlevered cost of equity is 12% while your cost of debt is 8%. The tax rate
Is 35%. What is your weighted average cost of capital?
A) 10.72%
B) 10.91%
C) 10.98%
D) 11.06%
E) 11.23%

Question

Quizplus · Accepted Answer

The WACC is calculated using the formula: WACC = (E/V) * Re + (D/V) * Rd * (1-Tc). Here, E = 0 (since no equity is mentioned), D = $300,000, V = $300,000, Re = 12%, Rd = 8%, Tc = 35%. WACC = (0/300,000) * 12% + (300,000/300,000) * 8% * (1-0.35) = 5.2%.

Your ﬁRm Has Earnings Before Interest and Taxes of $160,000