A firm uses only debt and equity in its capital structure. The firm's weight of equity is 35 percent. The firm's cost of equity is 14 percent and it has a tax rate of 30 percent. If the firm's WACC is 11 percent, what is the firm's before-tax cost of debt?
A)13.41 percent
B)6.10 percent
C)5.50 percent
D)(-3.00 percent)

Question

Quizplus · Accepted Answer

The WACC formula is: WACC = (E/V) * Re + (D/V) * Rd * (1-Tc). Given WACC = 11%, E/V = 0.35, Re = 14%, and Tc = 0.30, we can solve for Rd. Rearranging the formula and solving gives Rd = 13.41%.

A Firm Uses Only Debt and Equity in Its Capital