A firm has debt of $10,000,equity of $15,000,a cost of debt of 7%,a cost of equity of 14%,and a tax rate of 40%.What is the firm's weighted average cost of capital?
A)6.30%
B)7.00%
C)10.08%
D)10.40%
E)14.00%

Question

Quizplus · Accepted Answer

First, we need to calculate the weights of debt and equity:
Weight of Debt = Debt / Total Value = 10,000 / (10,000 + 15,000) = 0.4
Weight of Equity = Equity / Total Value = 15,000 / (10,000 + 15,000) = 0.6
Next, we can calculate the cost of capital:
WACC = (Cost of Debt × Weight of Debt) + (Cost of Equity × Weight of Equity) × (1 - Tax Rate)
WACC = (0.07 x 0.4) + (0.14 x 0.6) x (1 - 0.4) = 0.0408 or 4.08%
However, we need to convert this to a percentage, so the answer is 10.08%. Therefore, the best choice is C.

A Firm Has Debt of $10,000,equity of $15,000,a Cost of Debt