Felix Filter maintains a debt-equity ratio of .6.The cost of equity for Richardson Corp.is 16%,the cost of debt is 11% and the marginal tax rate is 30%.What is the weighted average cost of capital?

Question

Quizplus · Accepted Answer

Firstly, we need to calculate the weights of debt and equity:
Weight of debt = 0.6
Weight of equity = 0.4 (since debt-equity ratio is 0.6, equity must be 0.4)

Using the WACC formula:
WACC = (Weight of Equity * Cost of Equity) + (Weight of Debt * Cost of Debt * (1 - Tax Rate))
WACC = (0.4 * 16%) + (0.6 * 11% * (1 - 0.3))
WACC = 6.4% + 4.62%
WACC = 11.02%

Therefore, the correct answer is C) 12.89%.

Felix Filter Maintains a Debt-Equity Ratio of