Able Company's shareholders are receiving a 22.5%return and its bondholders get a 14% return. Based on a 50 percent debt/equity ratio, with no preferred stock and a 46 percent tax rate, find Able's weighted average cost of capital.

Question

Quizplus · Accepted Answer

The weighted average cost of capital (WACC) is calculated using the formula: WACC = (E/V) * Re + (D/V) * Rd * (1-Tc), where E is equity, D is debt, V is total value (E + D), Re is the cost of equity, Rd is the cost of debt, and Tc is the tax rate. With a 50% debt/equity ratio, E/V = 2/3 and D/V = 1/3. Plugging in the values: WACC = (2/3) * 22.5% + (1/3) * 14% * (1-0.46) = 15.03%.

Able Company's Shareholders Are Receiving a 22