Ready Supply Co. has a cost of debt of 8%. The risk-free rate of interest is 3% and the expected return on the market portfolio is 10%. If the firm has a beta of 0.90 and an effective tax rate of 30% with a capital structure that is 40% debt and 60% equity, what is the firm's weighted average cost of capital?

Question

Quizplus · Accepted Answer

The WACC is calculated using the formula: WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc). Here, Re is the cost of equity calculated using CAPM: Re = Rf + β * (Rm - Rf) = 3% + 0.90 * (10% - 3%) = 9.3%. The after-tax cost of debt is 8% * (1 - 0.30) = 5.6%. Therefore, WACC = 0.60 * 9.3% + 0.40 * 5.6% = 7.82%.