What is the WACC for a firm with equal amounts of debt and equity financing,a 17% before-tax company cost of capital,a 35% tax rate,and a 10% coupon rate on its debt that is selling at par value?

Question

Quizplus · Accepted Answer

We can calculate the weighted average cost of capital (WACC) by using the following formula:

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

Where:

E = Market value of the firm's equity
D = Market value of the firm's debt
V = Total market value of the firm (i.e., E + D)
Re = Cost of equity
Rd = Cost of debt
T = Tax rate

Since the firm has equal amounts of debt and equity financing, we can assume that E = D. Therefore:

V = E + D = 2E

E/V = 1/2
D/V = 1/2

Re is not given in the question, but we can use the company's before-tax cost of capital (17%) as an estimate.

Rd = 10% (since the coupon rate is equal to the yield to maturity when the bond is selling at par value)

T = 35%

Plugging these values into the formula, we get:

WACC = (1/2 x 17%) + (1/2 x 10% x (1 - 35%)) = 15.25%

Therefore, the correct answer is C) 15.25%.

What Is the WACC for a Firm with Equal Amounts