Assume that XYZ Corporation is a levered company with the following information: $$\begin{array} { l }
K _ { l } = \text { cost of levered equity capital for } \mathrm { XYZ } = 13 \% \
i = \text { before-tax borrowing cost } = 8 \% \
t = \text { marginal corporate income tax rate } = 30 \%
\end{array}$$ If XYZ's debt-to-total-market-value ratio is 40%,then its weighted average cost of capital,K,is:

Question

Assume that XYZ Corporation is a levered company with the following information: $$\begin{array} { l } 
K _ { l } = \text { cost of levered equity capital for } \mathrm { XYZ } = 13 \% \
i = \text { before-tax borrowing cost } = 8 \% \
t = \text { marginal corporate income tax rate } = 30 \%
\end{array}$$ If XYZ's debt-to-total-market-value ratio is 40%,then its weighted average cost of capital,K,is:

Quizplus · Accepted Answer

The formula for weighted average cost of capital (WACC) with taxes is:

WACC = ((E/V) * Ke) + ((D/V) * Kd * (1 - t))

where: 
E = market value of equity 
D = market value of debt 
V = total market value (E + D) 
Ke = cost of equity 
Kd = cost of debt 
t = tax rate

Given information: 
D/V = 40% 
E/V = 60% 
Ke = 13% 
Kd = 8% 
t = 30%

Plugging in the values:

WACC = ((0.6) * 0.13) + ((0.4) * 0.08 * (1 - 0.3)) 
WACC = 0.078 + 0.0224 
WACC = 0.1004 or 10%

Therefore, the best choice is C) 10%.

Assume That XYZ Corporation Is a Levered Company with the Following