A firm requires an investment of $30,000 and borrows $20,000 at 7%.If the return on equity is 15% and the tax rate is 30%,what is the firm's WACC?
A)8.27%
B)9.13%
C)10.4%
D)8.91%
E)9.67%

Question

Quizplus · Accepted Answer

The firm's Weighted Average Cost of Capital (WACC) can be calculated by taking into account the cost of equity, the cost of debt, and the tax rate. The cost of equity is given as 15%, and the cost of debt is 7%. The firm's debt is $20,000, and equity is the difference between the total investment required ($30,000) and the debt, which is $10,000. The tax shield on the debt is (1 - tax rate), which is (1 - 0.30) or 0.70. WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc)Where:- E = market value of the equity = $10,000- D = market value of the debt = $20,000- V = E + D = $30,000- Re = cost of equity = 15%- Rd = cost of debt = 7%- Tc = corporate tax rate = 30%Plugging in the numbers:WACC = ($10,000/$30,000) * 15% + ($20,000/$30,000) * 7% * (1 - 0.30)WACC = 0.333 * 15% + 0.667 * 7% * 0.70WACC = 5% + 3.27%WACC = 8.27%

A Firm Requires an Investment of $30,000 and Borrows $20,000