Jemisen's has expected earnings before interest and taxes of $6,200. Its unlevered cost of capital is 13 percent and its tax rate is 34 percent. The firm has debt with both a book and a face value of $2,500. This debt has a 9 percent coupon and pays interest annually. What is the firm's weighted average cost of capital?

Question

Quizplus · Accepted Answer

V_U = [$6,200 F1F1F1S1F1F1F10 (1 - 0.34)]/0.13 = $31,476.92V_L = $31,476.92 + (0.34 F1F1F1S1F1F1F10 $2,500) = $32,326.92V_E = $32,326.92 - $2,500 = $29,826.92R_E = 0.13 + (0.13 - 0.09) F1F1F1S1F1F1F10 ($2,500/$29,826.92) F1F1F1S1F1F1F10 (1 - 0.34) = 0.132213WACC = [($29,826.92/$32,326.92) F1F1F1S1F1F1F10 0.132213] + [($2,500/$32,326.92) F1F1F1S1F1F1F10 0.09 F1F1F1S1F1F1F10 (1 - 0.34)] = 12.66 percent

Jemisen's Has Expected Earnings Before Interest and Taxes of $6,200