14.2 Determining the Firm's Capital Structure Weights
Use the following information to answer the following question(s).
The following data concerning Grafton Computer Peripherals' capital structure is available.

-The percentage of debt in Grafton's weighted average cost of capital is:

Question

14.2 Determining the Firm's Capital Structure Weights
Use the following information to answer the following question(s).
The following data concerning Grafton Computer Peripherals' capital structure is available.
 
-The percentage of debt in Grafton's weighted average cost of capital is:

Quizplus · Accepted Answer

Weighted average cost of capital (WACC) = (E/V x Re) + [(D/V x Rd) x (1-T)]
where
E = market value of the firm's equity
D = market value of the firm's debt
V = E + D
Re = cost of equity
Rd = cost of debt
T = tax rate
Plugging in the given values:
Re = 13%
Rd = 8%
T = 40%
D/V = 25%
E/V = 75%
WACC = (0.75 x 0.13) + [(0.25 x 0.08) x (1 - 0.40)] = 0.0925 or 9.25%
The percentage of debt in Grafton's weighted average cost of capital is (0.25/1) x 100 = 25%. Therefore, the correct choice is C.