A firm has $56 million of common stock and $32 million of debt.The cost of equity is 11.4%,and the pretax cost of debt is 5.7%.If the firm's tax rate is 20%,what is the firm's WACC?

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 is the total value (E + D), Re is the cost of equity, Rd is the cost of debt, and Tc is the tax rate. Plugging in the given values: E = $56 million, D = $32 million, Re = 11.4%, Rd = 5.7%, and Tc = 20%. V = E + D = $56 million + $32 million = $88 million. WACC = ($56 million/$88 million) * 11.4% + ($32 million/$88 million) * 5.7% * (1-0.20) = 0.64 * 11.4% + 0.36 * 5.7% * 0.8 = 7.296% + 1.6152% = 8.9112%, which rounds to 8.91%.

A Firm Has $56 Million of Common Stock and $32