A company's cost of equity is 12 percent and its debt ratio is 30 percent. The cost of debt is 7.5 percent and the tax rate is 35 percent. What is the firm's weighted average cost of capital?
A)7)71 percent
B)9)86 percent
C)13.05 percent
D)13.46 percent

Question

Quizplus · Accepted Answer

The firm's weighted average cost of capital (WACC) is calculated using the formula: WACC = E/V * Re + D/V * Rd * (1-Tc), where E is the market value of the equity, D is the market value of the debt, V = E + D (the total market value of the firm's financing), Re is the cost of equity, Rd is the cost of debt, and Tc is the corporate tax rate. Given that the debt ratio (D/V) is 30%, the equity ratio (E/V) is 70% (100% - 30%). Plugging in the values: WACC = 0.7 * 12% + 0.3 * 7.5% * (1-0.35) = 8.4% + 1.4625% = 9.8625%, which rounds to 9.86%.

A Company's Cost of Equity Is 12 Percent and Its