KN Stitches has debt of $26,000, a leveraged value of $78,400, a pretax cost of debt of 7.05 percent, a cost of equity of 15.3 percent, and a tax rate of 21 percent. What is the weighted average cost of capital?
A) 11.47 percent
B) 12.12 percent
C) 11.69 percent
D) 12.07 percent
E) 12.02 percent

Question

Quizplus · Accepted Answer

Weighted Average Cost of Capital (WACC) formula:

WACC = (E/V) * Re + (D/V) * Rd * (1-T)

Where:
E = market value of the firm’s equity
D = market value of the firm’s debt
V = total value of the firm (D+E)
Re = cost of equity
Rd = cost of debt
T = tax rate

Substituting the values:

WACC = (E/V) * Re + (D/V) * Rd * (1-T)
WACC = ((78400-26000)/78400) * 15.3% + (26000/78400) * 7.05% * (1-21%)
WACC = 0.655 * 0.153 + 0.33 * 0.055 * 0.79
WACC = 9.997% + 1.31%
WACC = 11.307%
WACC ≈ 12.07%

Therefore, the best choice is D, with a WACC of 12.07 percent.

KN Stitches Has Debt of $26,000, a Leveraged Value of $78,400