Question

A firm has a capital structure with $3 in equity and $3 of debt. The cost of equity capital is 0.17 and the pretax cost of debt is 0.06. If the marginal tax rate of the firm is 0.48. Compute the weighted average cost of capital of the firm.

Answer 1

Answer:10.06 %

Explanation:

WACC = (Cost of equity × weight of equity ) + (Cost of debt × weight of debt)

Cost of equity = 0.17

Cost of debt = pretax cost of debt × (1 - tax rate )

0.06 × 0.52 = 0.0312

Weight of debt and equity = $3 / $6 = $0.5

WACC = ( 0.17 × 0.5 ) + (0.52×0.06 × 0.5) = 0.085 + 0.0156 = 0.1006 = 10.06%