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%
E)10.5%

Question

Quizplus · Accepted Answer

Weighted Average Cost of Capital (WACC) = (Cost of Equity x % Equity) + (Cost of Debt x %Debt)

Given:

Investment = $30,000
Borrowed amount = $10,000
Cost of debt (interest rate) = 6%
Cost of equity = 15%

Total financing = $30,000 + $10,000 = $40,000

% Equity = $30,000/$40,000 = 0.75 or 75%
% Debt = $10,000/$40,000 = 0.25 or 25%

WACC = (0.15 x 0.75) + (0.06 x 0.25) = 0.1125 or 11.25%

Therefore, the closest answer is C) 12%.

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