Find the weighted average cost of capital for a firm that has a debt-to-equity ratio of 1½,a tax rate of 34 percent,a levered cost of equity of 12 percent and a pre-tax cost of debt of 10 percent.

Question

Quizplus · Accepted Answer

WACC = (E/V)*Ke + (D/V)*Kd*(1-T)
where, 
E = market value of equity
D = market value of debt
V = E + D
Ke = cost of equity
Kd = cost of debt
T = tax rate

Given, 
debt-to-equity ratio = 1.5
Let's assume, 
market value of equity = $100
market value of debt = 1.5*$100 = $150
V = $100 + $150 = $250
tax rate = 34%
Ke = 12%
Kd = 10%

WACC = (100/250)*12% + (150/250)*10%*(1-34%)
= 8.76%

Therefore, the weighted average cost of capital for the firm is 8.76%. The correct option is C.

Find the Weighted Average Cost of Capital for a Firm