A firm has a total value of $500,000 and debt valued at $300,000. What is the weighted average cost of capital if the after tax cost of debt is 9% and the cost of equity is 14%?

Question

Quizplus · Accepted Answer

WACC = (E/V)* Cost of Equity + (D/V)* Cost of Debt * (1-Tax Rate)

where E = Equity value, D = Debt value, V = Total value, and Tax Rate is the corporate tax rate.

Given:

E = 500,000 - 300,000 = $200,000

D = $300,000

V = $500,000

Cost of Equity = 14%

Cost of Debt = 9%

Tax Rate = not given

Assuming a tax rate of 35% (typical for US corporates), we get:

WACC = (200,000/500,000)*14% + (300,000/500,000)*9%*(1-35%)

= 11%

Therefore, the correct answer is Option C) 11.000%.

A Firm Has a Total Value of $500,000 and Debt