A firm requires an investment of $30,000 and borrows $15,000 at 6%.If the cost of equity is 18%,and the firm's WACC is 10.8%,what is the firm's tax rate?
A)40%
B)35%
C)30%
D)45%
E)50%

Question

Quizplus · Accepted Answer

The firm's Weighted Average Cost of Capital (WACC) is calculated using the formula: WACC = E/V * Re + D/V * Rd * (1 - Tc), where E is the market value of the equity, D is the market value of the debt, V = E + D is the total market value of the firm's financing (equity and debt), Re is the cost of equity, Rd is the cost of debt, and Tc is the corporate tax rate. Given E = $15,000, D = $15,000, Re = 18%, Rd = 6%, and WACC = 10.8%, we can solve for Tc, which results in a tax rate of 40%.

A Firm Requires an Investment of $30,000 and Borrows $15,000