Given the following information on S & G Inc.'s capital structure,compute the company's weighted average cost of capital.

The company's marginal tax rate is 40%.
A) 13.3%
B) 7.1%
C) 10.6%
D) 10%

Question

Given the following information on S & G Inc.'s capital structure,compute the company's weighted average cost of capital.

The company's marginal tax rate is 40%.
A) 13.3% 
B) 7.1% 
C) 10.6% 
D) 10%

Quizplus · Accepted Answer

Weighted Average Cost of Capital (WACC) = (Weight of Debt x Cost of Debt x (1-Tax Rate)) + (Weight of Equity x Cost of Equity)

Weight of Debt = 30% 
Cost of Debt = 7%
Weight of Equity = 70% 
Cost of Equity = 12.5%
Tax Rate = 40%

WACC = (0.3 x 0.07 x (1-0.4)) + (0.7 x 0.125) 
WACC = 0.021 + 0.0875 
WACC = 0.1085 or 10.85%

Therefore, the best choice is C) 10.6% as it is the closest answer to our calculated WACC of 10.85%.

Given the Following Information on S & G Inc