Kokapeli,Inc.has a target capital structure of 40% debt and 60% common equity,and has a 40% marginal tax rate.If the firm's yield to maturity on bonds is 7.5% and investors require a 15% return on the firm's common stock,what is the firm's weighted average cost of capital?
A) 7.20%
B) 10.80%
C) 12.00%
D) 12.25%

Question

Quizplus · Accepted Answer

The firm's weighted average cost of capital (WACC) can be 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. Plugging in the given values: WACC = (0.60 * 15%) + ((0.40 * 7.5%) * (1 - 0.40)). This simplifies to WACC = 9% + 1.8% = 10.8%.