Werner Corporation has a target capital structure that consists of 40% debt and 60% equity. Werner can borrow at an interest rate of 10%. Also, Werner has determined its cost of equity to be 14%. Werner's tax rate is 40%. What is Werner's weighted average cost of capital?
A) 10.80%
B) 12.40%
C) 9.20%
D) None of the above

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, Re is cost of equity, D is debt, Rd is cost of debt, and Tc is tax rate. Substituting the values: WACC = (0.6 * 14%) + (0.4 * 10% * (1-0.4)) = 8.4% + 2.4% = 10.80%.

Werner Corporation Has a Target Capital Structure That Consists of 40