Question

Solve for the weighted average cost of capital. 11.28% = K1 = cost of equity capital for a leveraged firm 1/2 debt-to-total-market-value ratio 8.0% = 1 = before-tax borrowing cost 40.0% -τ - marginal corporate income tax rateA. 8.67 percent B. 8.00 percent C. 7.60 percent D. 7.33 percent

Answer 1

Answer:

WACC = Ke(E/V)  + Kd(D/V)(1 - T)

WACC = 11.28(0.50) + 8.0(0.5)(1 - 0.40)

WACC = 5.64  +  2.40

WACC = 8.0%

The  correct answer is B

Explanation:

WACC equals cost of equity multiplied by proportion of equity in the capital structure plus after-tax cost of debt multiplied by proportion of debt in the capital structure. The proportion of equity and debt in the capital structure are 50% respectively. Ke refers to cost of equity, Kd denotes before tax cost of debt, T represents tax rate, E/V denotes proportion of equity in the capital structure and D/V represents proportion of debt in the capital structure.