A firm has debt of $7,000,equity of $12,000,a leveraged value of $8,900,a cost of debt of 7%,a cost of equity of 14%,and a tax rate of 30%. What is the firm's weighted average cost of capital?
A) 8.45%
B) 9.90%
C) 10.65%
D) 12.50%
E) 14.00%

Question

Quizplus · Accepted Answer

Weighted Average Cost of Capital (WACC) can be calculated as:

WACC = (cost of equity * equity/leveraged value) + (cost of debt * debt/leveraged value) * (1 - tax rate)

Thus,

WACC = (0.14 * 12000/8900) + (0.07 * 7000/8900) * (1 - 0.30)

WACC = 0.1065 or 10.65%

Therefore, the answer is C) 10.65%.

A Firm Has Debt of $7,000,equity of $12,000,a Leveraged Value