The General Store has a cost of equity of 15.8 per cent,a pre-tax cost of debt of 7.7 per cent,and a tax rate of 32 per cent.What is the firm's weighted average cost of capital if the debt-equity ratio is 0.40,assuming a classical tax system?

Question

Quizplus · Accepted Answer

The correct answer is A because the weighted average cost of capital (WACC) is calculated as follows:WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc)where:E/V is the proportion of equity financingD/V is the proportion of debt financingRe is the cost of equityRd is the cost of debtTc is the corporate tax rateIn this case, E/V = 1 / (1 + 0.40) = 0.7143, D/V = 0.40 / (1 + 0.40) = 0.2857, Re = 15.8%, Rd = 7.7%, and Tc = 32%.Therefore, WACC = (0.7143 * 15.8%) + (0.2857 * 7.7% * (1 - 0.32)) = 12.78%.

The General Store Has a Cost of Equity of 15