The General Store has a cost of equity of 15.8 percent, a pre-tax cost of debt of 7.7 percent, and a tax rate of 32 percent. What is the firm's weighted average cost of capital if the debt-equity ratio is 0.40?

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Quizplus · Accepted Answer

The WACC is calculated using the formula: WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc), where E is equity, D is debt, V is total value (E + D), Re is cost of equity, Rd is cost of debt, and Tc is tax rate. With a debt-equity ratio of 0.40, D/E = 0.40, so D = 0.40E. Therefore, V = E + 0.40E = 1.40E, so E/V = 1/1.40 and D/V = 0.40/1.40. Plugging in the values: WACC = (1/1.40) * 15.8% + (0.40/1.40) * 7.7% * (1 - 0.32) = 12.78%.

The General Store Has a Cost of Equity of 15