Your ﬁrm has earnings before interest and taxes of $210,000. Both the book and the market value of debt is $500,000. Your unlevered cost of equity is 9% while your cost of debt is 7%. The tax rate
Is 35%. What is your weighted average cost of capital?
A) 8.07%
B) 8.19%
C) 8.31%
D) 8.54%
E) 8.67%

Question

Quizplus · Accepted Answer

The WACC is calculated using the formula: WACC = (E/V) * Re + (D/V) * Rd * (1-Tc). Here, E = 0 (since the firm is fully financed by debt), D = $500,000, V = $500,000, Re = 9%, Rd = 7%, and Tc = 35%. Thus, WACC = (0/500,000) * 9% + (500,000/500,000) * 7% * (1-0.35) = 4.55%. However, since the firm is fully financed by debt, the WACC is equal to the after-tax cost of debt, which is 7% * (1-0.35) = 4.55%. The closest option is 8.07%, which is incorrect, indicating a potential error in the options provided.

Your ﬁRm Has Earnings Before Interest and Taxes of $210,000