Given the following information, what is JEM Inc.'s weighted average cost of capital? Market value of equity = $50 million; market value of debt = $30 million; cost of equity = 16%; cost of debt = 8%;
Equity beta = 1.25; tax rate = 34%.

Question

Quizplus · Accepted Answer

The correct answer is A because the weighted average cost of capital (WACC) is calculated as follows:WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc)where:E = market value of equityV = total value of the firm (E + D)Re = cost of equityD = market value of debtRd = cost of debtTc = tax rateIn this case, we have:E = $50 millionV = $50 million + $30 million = $80 millionRe = 16%D = $30 millionRd = 8%Tc = 34%Plugging these values into the formula, we get:WACC = (50/80) * 0.16 + (30/80) * 0.08 * (1 - 0.34) = 11.98%

Given the Following Information, What Is JEM Inc