Fancee Restaurant's cost of equity is 15.3 per cent and its after-tax cost of debt is 6.1 per cent.What is the firm's weighted average cost of capital if its debt-equity ratio is 0.58 and the tax rate is 30 per cent? Assume a classical tax system.

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Quizplus · Accepted Answer

The WACC is calculated as: WACC = (E/V) * Re + (D/V) * Rd * (1-Tc), where E/V = equity proportion, D/V = debt proportion, Re = cost of equity, Rd = cost of debt, Tc = tax rate. With a debt-equity ratio of 0.58, D/V = 0.58/(1+0.58) and E/V = 1/(1+0.58). Plugging in the values: WACC = (1/1.58) * 15.3% + (0.58/1.58) * 6.1% * (1-0.30) = 11.92%.

Fancee Restaurant's Cost of Equity Is 15