Suppose that Topstone Industries has a cost of equity of 14% and a cost of debt of 9%. If the target debt/equity ratio is 75%, and the tax rate is 34%, what is Topstone's weighted average cost of
Capital (WACC)?

Question

Quizplus · Accepted Answer

First, we need to calculate the weight of equity and debt based on the target debt/equity ratio of 75%.

Equity weight = 1 / (1 + debt/equity) = 1 / (1 + 0.75) = 0.5714 
Debt weight = 0.75 / (1 + debt/equity) = 0.75 / (1 + 0.75) = 0.4286

Next, we can use the following formula to calculate the WACC:

WACC = (cost of equity x equity weight) + (cost of debt x debt weight x (1 - tax rate))

WACC = (0.14 x 0.5714) + (0.09 x 0.4286 x (1 - 0.34)) = 0.0804 or 8.04%

Therefore, the best choice is D, 10.5%.

Suppose That Topstone Industries Has a Cost of Equity of 14