M&M Proposition 2: A company has a WACC of 8.5%, a pretax cost of debt of 5%, a cost of equity of 12%, and a marginal corporate income tax rate of 35%. What per cent of the company is financed with equity?

Question

Quizplus · Accepted Answer

Using the formula for WACC: WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc), where E is equity, D is debt, V is total value, Re is cost of equity, Rd is cost of debt, and Tc is tax rate. Solving for E/V, we find that the company is financed with 60% equity.

M&M Proposition 2: a Company Has a WACC of 8