Question

Assume that the firm is 40% financed by debt and 60% financed by equity. Its cost of debt is 8% and the cost of equity is 15%. The tax rate is 40%. What is the firm’s WACC?

Answer 1

Answer:

10.92%

Explanation:

A firm is 40% financed by debt

= 40/100

= 0.40

The firm is also 60% financed by equity

= 60/100

= 0.60

Its cost of debt is 8%

=8/100

=0.08

Cost of equity is 15%

= 15/100

= 0.15

Tax rate is 40%

= 40/100

= 0.40

Therefore, the firm's WACC can be calculated as follows

WACC= 0.40×0.08×(1-0.40) + 0.60×0.15

= 0.032×0.6 + 0.09

= 0.0192 + 0.09

= 0.1092×100

= 10.92%

Hence the firm's WACC is 10.92%