A firm undertakes an investment that is financed with $10,000 of equity and $30,000 of debt.If the return on equity is 14%,the cost of debt is 7% and the tax rate is 25%,what is the firm's WACC?

Question

Quizplus · Accepted Answer

The Weighted Average Cost of Capital (WACC) is calculated as follows: 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 is the total value (E + D), Re is the cost of equity, Rd is the cost of debt, and Tc is the corporate tax rate. Plugging in the given values: E = $10,000, D = $30,000, V = $40,000, Re = 14%, Rd = 7%, Tc = 25%. WACC = [(10,000/40,000) * 14%] + {[(30,000/40,000) * 7%] * (1 - 0.25)} = 0.035 + 0.039375 = 0.074375 or 7.44%.

A Firm Undertakes an Investment That Is Financed with $10,000