A firm uses only debt and equity in its capital structure. The firm's weight of equity is 70%. The firm's cost of equity is 13% and it has a tax rate of 30%. If the firm's WACC is 11%, what is the firm's before-tax cost of debt?
A) 7.17%
B) 9.05%
C) 6.38%
D) 5.36%

Question

Quizplus · Accepted Answer

The WACC formula is: WACC = (E/V) * Re + (D/V) * Rd * (1-Tc). Given WACC = 11%, E/V = 0.7, Re = 13%, and Tc = 0.3, solve for Rd: 11% = 0.7 * 13% + 0.3 * Rd * (1-0.3). Solving gives Rd = 9.05%.

A Firm Uses Only Debt and Equity in Its Capital