Answer:
WACC=17.15%
Explanation;
MV of equity=EBIT8(1-t)/Ke
MV of equity=100,000*(1-.31)/.18=$383,333
Total value of the firm=Market value of equity+present value of tax savings on interest
Total value of the firm based on EBIT= $383,333+.31*61,000
Total Value of the firm=$402,243
Keg=Keu+(Keu-Kd)*D/E*(1-t)
where Keu= cost of equity of un-geared company=18%
Keg=cost of equity of geared company=?
Kd=cost of debt=11%
Keg=.18+(.18-11)*61,000/(402,243-61,000)*.69
Keg=.18+.0086
Keg=18.86%
NoW revised WACC will be
WACC=Keg*MV of equity+Kd(1-t)*cost of debt/(total value of firm)
WACC=.1886*(402,243-61,000)+.11(1-.31)*61,000/(402,243)
WACC=17.15%
