Assume that XYZ Corporation is a leveraged company with the following information: $$\begin{array} { l }
K _ { l } = \text { cost of equity capital for } \mathrm { XYZ } = 13 \% \
i = \text { before-tax borrowing cost } = 8 \% \
t = \text { marginal corporate income tax rate } = 30 \%
\end{array}$$ 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 leveraged company with the following information: $$\begin{array} { l } 
K _ { l } = \text { cost of equity capital for } \mathrm { XYZ } = 13 \% \
i = \text { before-tax borrowing cost } = 8 \% \
t = \text { marginal corporate income tax rate } = 30 \%
\end{array}$$ 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 to calculate the weighted average cost of capital (WACC) is:

WACC = (E/V) x Re + (D/V) x Rd x (1 - t)

Where,

E = market value of equity
V = total market value of the firm (debt + equity)
D = market value of debt
Re = cost of equity capital
Rd = before-tax borrowing cost
t = marginal corporate income tax rate

Given:

Debt-to-total-market-value ratio = 40%
Equity-to-total-market-value ratio = 60%
Before-tax borrowing cost (Rd) = 8%
Cost of equity capital (Re) = 13%
Marginal corporate income tax rate (t) = 30%

Using the above information, we can calculate the WACC as follows:

WACC = (0.6 x 0.13) + (0.4 x 0.08 x (1 - 0.3)) = 0.078 + 0.0224 = 0.1004 = 10.04%

Therefore, the best choice is C) 10%.

Assume That XYZ Corporation Is a Leveraged Company with the Following