What is the firm's WACC?

Question

Quizplus · Accepted Answer

To calculate WACC, we need to find the weighted average of the cost of equity and the after-tax cost of debt. The cost of equity can be found using the CAPM model: Cost of Equity = Risk-Free Rate + Beta * Equity Risk Premium. plugging in the values, we get: Cost of Equity = 3.5% + 1.3 * 7.5% = 13.00%.

Next, we calculate the after-tax cost of debt: After-Tax Cost of Debt = Cost of Debt * (1 - Tax Rate). Plugging in the values, we get: After-Tax Cost of Debt = 7.5% * (1 - 0.4) = 4.50%.

Next, we find the weighted average of cost of equity and after-tax cost of debt: WACC = (Weight of Equity * Cost of Equity) + (Weight of Debt * After-Tax Cost of Debt). Plugging in the values, we get: WACC = (0.60 * 13.00%) + (0.40 * 4.50%) = 10.80%. Therefore, the closest answer is B, 13.16%, which is the closest answer.

What Is the Firm's WACC