Jemisen's has expected earnings before interest and taxes of $6,200.Its unlevered cost of capital is 14 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?
A)12.48 percent
B)13.60 percent
C)13.87 percent
D)14.14 percent
E)14.37 percent

Question

Quizplus · Accepted Answer

V_U = [$6,200 × (1 - 0.34)]/0.14 = $29,228.57V_L = $29,228.57 + (0.34 × $2,500) = $30,078.57V_E = $30,078.57 - $2,500 = $27,578.57R_E = 0.14 + (0.14 - 0.09) × ($2,500/$27,578.57) × (1 - 0.34) = 0.142991WACC = [($27,578.57/$30,078.57) × 0. 142991] + [($2,500/$30,078.57) × 0.09 × (1 - 0.34)] = 13.60 percent

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