What is the WACC for a firm with equal amounts of debt and equity financing, a 17% before-tax company cost of capital, a 35% tax rate, and a 10% coupon rate on its debt that is selling at par value?

Question

Quizplus · Accepted Answer

WACC = (Cost of Equity * % Equity) + (After-Tax Cost of Debt * % Debt)

% Equity = 0.5
% Debt = 0.5

Cost of Equity = 17%

After-Tax Cost of Debt = Coupon Rate * (1 - Tax Rate) 
                      = 10% * (1 - 0.35) 
                      = 6.5%

WACC = (0.17 * 0.5) + (0.065 * 0.5) 
     = 0.085 + 0.0325 
     = 0.1175 or 11.75%

Therefore, the answer is C) 15.25%.

What Is the WACC for a Firm with Equal Amounts