Given the following information on S & G Inc.'s capital structure,compute the company's weighted average cost of capital. The company's marginal tax rate is 40%.
A) 13.3%
B) 7.1%
C) 10.6%
D) 10%

Question

Given the following information on S & G Inc.'s capital structure,compute the company's weighted average cost of capital.  The company's marginal tax rate is 40%.
A) 13.3% 
B) 7.1% 
C) 10.6% 
D) 10%

Quizplus · Accepted Answer

The Weighted Average Cost of Capital (WACC) for S & G Inc. can be calculated as follows:

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

where: 
E = market value of the firm's equity 
D = market value of the firm's debt 
V = total value of the firm (E + D) 
Re = cost of equity 
Rd = cost of debt 
T = marginal tax rate

Using the information given:

E = $2 million 
D = $1 million 
Re = 15% 
Rd = 9% 
T = 40%

V = E + D = $2 million + $1 million = $3 million

E/V = $2 million / $3 million = 0.67 
D/V = $1 million / $3 million = 0.33

Substituting the values into the WACC formula:

WACC = (0.67 x 0.15) + (0.33 x 0.09 x (1 - 0.4)) 
= 0.1005 or 10.6%

Therefore, the best choice is C) 10.6%.

Given the Following Information on S & G Inc