A firm has a capital structure with $30 million in equity and $90 million of debt. The cost of equity capital is 10% and the pre-tax cost of debt is 6%. If the marginal tax rate of the firm is 30%, compute the weighted average cost of capital of the firm.

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Quizplus · Accepted Answer

The WACC is calculated as: WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc), where E = equity, D = debt, V = E + D, Re = cost of equity, Rd = cost of debt, and Tc = tax rate. Here, E = $30M, D = $90M, V = $120M. Re = 10%, Rd = 6%, Tc = 30%. WACC = (30/120) * 10% + (90/120) * 6% * (1 - 0.3) = 2.5% + 3.15% = 5.65%, approximately 5.7%.

A Firm Has a Capital Structure with $30 Million in Equity