Swirlpool, Inc. has found that its cost of common equity capital is 18 percent, and its cost of debt capital is 8 percent. The firm is financed with 60 percent common shares and 40 percent debt. What is the after-tax weighted average cost of capital for Swirlpool, if it is subject to a 40 percent marginal tax rate?

Question

Quizplus · Accepted Answer

The after-tax weighted average cost of capital (WACC) can be calculated using the following formula:

WACC = (E/V) * Re + (D/V) * Rd * (1 - T)

Where:
E = Market value of equity
D = Market value of debt
V = Total value of the firm (E + D)
Re = Cost of equity
Rd = Cost of debt
T = Marginal tax rate

Given information:
Re = 18%
Rd = 8%
D/V = 40%
E/V = 60%
T = 40%

Using the above formula, we can calculate the WACC as follows:

WACC = (0.6 * 0.18) + (0.4 * 0.08 * (1 - 0.4))
WACC = 0.108 + 0.0192
WACC = 0.1272 or 12.72%

Therefore, the after-tax weighted average cost of capital for Swirlpool is 12.72%. The correct answer is C).