A firm requires an investment of $20,000 and borrows $10,000 at 8%.If the return on equity is 20%,what is the firm's pre tax WACC?
A)14%
B)15%
C)16%
D)17%

Question

Quizplus · Accepted Answer

The firm's pre-tax WACC is calculated by taking the weighted average of the cost of equity and the cost of debt. The cost of equity is 20%, and the cost of debt is 8%. The firm has $10,000 in equity and $10,000 in debt, so the weights are 0.5 for both. WACC = (0.5 * 20%) + (0.5 * 8%) = 14%.

A Firm Requires an Investment of $20,000 and Borrows $10,000