Percy's Wholesale Supply has earnings before interest and taxes of $106,000.Both the book and the market value of debt is $170,000.The unlevered cost of equity is 15.5 percent while the pre-tax cost of debt is 8.6 percent.The tax rate is 38 percent.What is the firm's weighted average cost of capital?

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Quizplus · Accepted Answer

V_U = [$106,000 × (1 - 0.38)]/0.155 = $424,000V_L = $424,000 + (0.38 × $170,000) = $488,600V_E = $488,600 - $170,000 = $318,600R_E = 0.155 + (0.155 - 0.086) × ($170,000/$318,600) × (1 - 0.38) = 0.177827WACC = [($318,600/$488,600) × 0.177827] + [($170,000/$488,600) × 0.086 × (1 - 0.38)] = 13.45 percent

Percy's Wholesale Supply Has Earnings Before Interest and Taxes of $106,000.Both