Using the WACC in practice: Ronnie's Comics has found that its cost of common equity capital is 15 percent and its cost of debt capital is 12 percent. If the firm is financed with $250,000,000 of common shares (market value) and $750,000,000 of debt, then what is the after-tax weighted average cost of capital for Ronnie's if it is subject to a 35 percent marginal tax rate?

Question

Quizplus · Accepted Answer

The WACC is calculated as: WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc), where E is equity, V is total value (equity + debt), Re is cost of equity, D is debt, Rd is cost of debt, and Tc is tax rate. Substituting the values: WACC = ($250M/$1000M) * 15% + ($750M/$1000M) * 12% * (1 - 0.35) = 9.6%.

Using the WACC in Practice: Ronnie's Comics Has Found That