Question

Shirley’s and Son have a debt-equity ratio of .60 and a tax rate of 35 percent. The firm does not issue preferred stock. The cost of equity is 10 percent and the pre-tax cost of debt is 8 percent. What is Shirley’s weighted average cost of capital?
a. 8.4%
b. 6.1%
c. 9.4%
d. 8.2%
e. 9.1%

Answer 1

Answer:

d. 8.2%

Explanation:

The computation of the WACC is shown below:

= Weightage of debt × cost of debt × ( 1- tax rate) + (Weightage of  common stock) × (cost of common stock)

where,  

Weighted of debt = Debt ÷ total firm

= (0.60 ÷ 1.60)

= 0.375

And, the weighted of common stock = (Common stock ÷ total firm)

                                                              = 1 ÷ 1.60

                                                              = 0.625  

The total firm is

= 0.60 + 1

= 1.60

Now put these values to the above formula  

So, the value would equal to

= (0.375 × 8%) × ( 1 - 35%) + (0.625 × 10%)

= 1.95% + 6.25%

= 8.20%