Calculate a firm's WACC given that the total value of the firm is $2,000,000,$600,000 of which is debt,the cost of debt and equity is 10% and 15%,respectively,and the firm pays no taxes.

Question

Quizplus · Accepted Answer

We can use the WACC formula:

WACC = (E/V) x Re + (D/V) x Rd x (1-Tc)

where:

E = market value of equity
V = total firm value (E+D)
Re = cost of equity
D = market value of debt
Rd = cost of debt
Tc = corporate tax rate (assumed to be 0 in this case)

Plugging in the given values:

E = $2,000,000 - $600,000 = $1,400,000
V = $2,000,000
Re = 15%
D = $600,000
Rd = 10%

WACC = ($1,400,000/$2,000,000) x 15% + ($600,000/$2,000,000) x 10% x (1-0) = 13.5%

Therefore, the best choice is C) 13.5%.

Calculate a Firm's WACC Given That the Total Value of the Firm