Werner Corporation has a target capital structure that consists of 40 percent debt and 60 percent equity. Werner can borrow at an interest rate of 10 percent. Also, Werner has determined its cost of equity to be 14 percent. Werner's tax rate is 40 percent. What is Werner's weighted average cost of capital?
A)10.8 percent
B)12.4 percent
C)9.2 percent
D)none of the above

Question

Werner Corporation has a target capital structure that consists of 40 percent debt and 60 percent equity. Werner can borrow at an interest rate of 10 percent. Also, Werner has determined its cost of equity to be 14 percent. Werner's tax rate is 40 percent. What is Werner's weighted average cost of capital?​
A)10.8 percent
B)12.4 percent
C)9.2 percent
D)none of the above

Quizplus · Accepted Answer

The WACC is calculated as: WACC = (E/V * Re) + (D/V * Rd * (1-Tc)), where E is equity, V is total value (equity + debt), Re is cost of equity, D is debt, Rd is cost of debt, and Tc is tax rate. Substituting the values: WACC = (0.6 * 14%) + (0.4 * 10% * (1-0.4)) = 8.4% + 2.4% = 10.8%.

Werner Corporation Has a Target Capital Structure That Consists of 40