Question

WACKO Ltd. has $30 million in debt, equity of $55 million, an after-tax cost of debt of 6 percent, a cost of equity of 9 percent, and a tax rate of 25 percent. The firm's weighted average cost of capital (WACC) is

Answer 1

Answer:

weighted average cost of capital =  7.4%

Explanation:

given data

debt = $30 million

equity = $55 million

after-tax cost of debt = 6 percent

cost of equity = 9 percent

tax rate = 25 percent

solution

we get here weighted average cost of capital that is express as

weighted average cost of capital = weighted Cost of equity + weighted Cost (After tax) of debts.  .....................1

here weighted Cost of equity is

weighted Cost of equity = weight × Specific cost % (after tax)  ...........2

weighted Cost of equity =  $\frac{55}{85}$ × 9 %

weighted Cost of equity = 5.82%

and

weighted Cost (After tax) of debts is

weighted Cost (After tax) of debts = $\frac{30}{85}$ × 6 (1 - 0.25)

weighted Cost (After tax) of debts = 1.58 %

so

weighted average cost of capital = 5.82%  + 1.58 %

weighted average cost of capital =  7.4%