A firm requires an investment of $30,000 and borrows $10,000 at 6%.If the return on equity is 15%,what is the firm's pre tax WACC?
A)14%
B)13%
C)12%
D)11%

Question

Quizplus · Accepted Answer

The formula for calculating WACC is:

WACC = (E/V * Re) + (D/V * Rd * (1 - Tc))

Where: 
E = market value of equity
D = market value of debt
V = E + D
Re = cost of equity
Rd = cost of debt
Tc = corporate tax rate

Given information: 
E = $30,000 
D = $10,000 
Rd = 6%
Re = 15%

Since there is no information on the corporate tax rate, we assume it to be zero. Therefore, the WACC can be calculated as:

WACC = (30,000/40,000 * 15%) + (10,000/40,000 * 6%)

WACC = 11.25%

Rounding up to the nearest percent, the answer is C) 12%.

A Firm Requires an Investment of $30,000 and Borrows $10,000