Find the weighted average cost of capital for a firm that has a debt-to-equity ratio of 1½, a tax rate of 34%, a levered cost of equity of 12% and an after-tax cost of debt of 8%.

Question

Quizplus · Accepted Answer

The WACC formula is: WACC = (E/V) * Re + (D/V) * Rd * (1-Tc). With a debt-to-equity ratio of 1.5, D/E = 1.5, so D/V = 1.5/2.5 and E/V = 1/2.5. Plugging in the values: WACC = (1/2.5) * 12% + (1.5/2.5) * 8% * (1-0.34) = 9.6%.

Find the Weighted Average Cost of Capital for a Firm