Takeoka's Sushi To Go has estimated the following cost of debt before-tax)and cost of equity.
What is the cost of capital at Takeoka's optimal capital structure given the above information and a 40% effective tax rate?

Question

Takeoka's Sushi To Go has estimated the following cost of debt before-tax)and cost of equity. 
What is the cost of capital at Takeoka's optimal capital structure given the above information and a 40% effective tax rate?

Quizplus · Accepted Answer

The cost of debt is 6.5% and the cost of equity is 15%. Assuming an optimal capital structure where debt and equity are balanced, the weight of debt and equity would each be 50%. Using the formula for weighted average cost of capital (WACC), we can calculate the cost of capital:

WACC = (wD × rD × (1 - t)) + (wE × rE)
where:
wD = weight of debt = 50%
wE = weight of equity = 50%
rD = cost of debt = 6.5%
rE = cost of equity = 15%
t = tax rate = 40%

WACC = (0.5 × 0.065 × (1-0.40)) + (0.5 × 0.15)
WACC = 0.0325 + 0.075
WACC = 0.1075 or 10.75%

Therefore, the closest answer choice is C) 11.13%.

Takeoka's Sushi to Go Has Estimated the Following Cost of Debt