The weighted-average cost of capital,after tax,for a firm with a 65/35 debt/equity split,8% cost of debt,15% cost of equity,and a 35% tax rate would be:

Question

Quizplus · Accepted Answer

First, calculate the cost of equity after-tax using the formula:

Cost of equity after-tax = Cost of equity * (1 - Tax rate)
Cost of equity after-tax = 0.15 * (1 - 0.35)
Cost of equity after-tax = 0.0975 or 9.75%

Next, calculate the weighted-average cost of capital using the formula:

WACC = (Weight of debt * Cost of debt) + (Weight of equity * Cost of equity after-tax)
WACC = (0.65 * 0.08) + (0.35 * 0.0975)
WACC = 0.052 + 0.0341
WACC = 0.0861 or 8.61%

Therefore, the answer is B: 8.63%.

The Weighted-Average Cost of Capital,after Tax,for a Firm with a 65/35