Assume that XYZ Corporation is a leveraged company with the following information: K_l = cost of equity capital for XYZ = 13%
I = before-tax borrowing cost = 8%
T = marginal corporate income tax rate = 30%
If XYZ's debt-to-total-market-value ratio is 40%, then its weighted average cost of capital, K, is:

Question

Quizplus · Accepted Answer

The weighted average cost of capital (WACC) formula 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 of the firm (E + D) Ke = cost of equity Kd = cost of debt T = tax rate Given information: - K_l = Ke = 13% - I = Kd = 8% - T = 30% - debt-to-total-market-value ratio = D/V = 40% - equity-to-total-market-value ratio = E/V = 1 - D/V = 60% Using these values, we can calculate the WACC as: WACC = (0.6 * 0.13) + (0.4 * 0.08 * (1 - 0.3)) = 0.078 + 0.0224 = 0.1004 or 10.04% Therefore, the best choice is C) 10%.

Assume That XYZ Corporation Is a Leveraged Company with the Following