The Felix Filter Corp. maintains a debt-equity ratio of .6. The cost of equity for Richardson Corp. is 16%,the cost of debt is 11% and the marginal tax rate is 30%. What is the weighted average cost of capital?

Question

Quizplus · Accepted Answer

First, we need to calculate the weight of equity and debt:
Weight of equity = 1 - Debt-equity ratio = 1 - 0.6 = 0.4
Weight of debt = Debt-equity ratio = 0.6

Next, we calculate the cost of capital:
Cost of equity = 16%
Cost of debt = 11%
Marginal tax rate = 30%

WACC = (Weight of equity x Cost of equity) + (Weight of debt x Cost of debt x (1 - Marginal tax rate))
WACC = (0.4 x 16%) + (0.6 x 11% x (1 - 30%))
WACC = 6.4% + 4.62%
WACC = 11.02%

Therefore, the correct answer is C.