Filter Corp.maintains a debt-equity ratio of .45.The cost of equity is 14.7 percent,the pretax cost of debt is 8.1 percent,and the tax rate is assumed to be 23 percent.What is the weighted average cost of capital?

Question

Quizplus · Accepted Answer

First, we need to calculate the weight of debt and equity:

Weight of debt = debt / (debt + equity) = 0.45 / (0.45 + 1) = 0.31
Weight of equity = equity / (debt + equity) = 1 / (0.45 + 1) = 0.69

Next, we can use the weighted average cost of capital formula:

WACC = (cost of equity x weight of equity) + (pretax cost of debt x weight of debt x (1 - tax rate))

WACC = (0.147 x 0.69) + (0.081 x 0.31 x (1-0.23)) = 0.1207 or 12.07%

Therefore, the best choice is C, and the weighted average cost of capital is 12.07%.