A firm has a target debt-to-equity ratio of 1.Its cost of equity equals 12 percent,the cost of debt is 8 percent,and the tax rate is 30 percent.What is the weighted average cost of capital (WACC)?

Name: A firm has a target debt-to-equity ratio of 1.Its cost of equity equals 12 percent,the cost of debt is 8 percent,and the tax rate is 30 percent.What is the weighted average cost of capital (WACC)?
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Question

Quizplus · Accepted Answer

D/E = 1.0 => D/(D + E) = E/(D + E) = 0.50
WACC = {0.5 * 8% * (1 – 0.3)} + (0.5 * 12%) = 8.8%

A Firm Has a Target Debt-To-Equity Ratio of 1