A firm requires an investment of $20,000.The firm's debt cost of capital is 6%,and its return on equity is 15%.If the firm's pre-tax WACC is 10.5%,how much did the firm borrow?

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The firm's pre-tax WACC (Weighted Average Cost of Capital) is given as 10.5%, which is a weighted average of the cost of debt and the cost of equity. The formula for WACC is:$$WACC = \frac{D}{V} \times Rd + \frac{E}{V} \times Re$$where $D$ is the amount of debt, $E$ is the equity, $V = D + E$ is the total financing (which is $20,000 in this case), $Rd$ is the cost of debt (6%), and $Re$ is the cost of equity (15%).Given that the WACC is 10.5%, we can set up the equation:$$10.5\% = \frac{D}{20,000} \times 6\% + \frac{20,000 - D}{20,000} \times 15\%$$Solving for $D$, we find that $D = $10,000$. This means the firm borrowed $10,000.

A Firm Requires an Investment of $20,000