Solve for the weighted average cost of capital. 11.28% = K1 = cost of equity capital for a leveraged firm 1/2 debt-to-total-market-value ratio 8.0% = 1 = before-tax borrowing cost 40.0% - τ - marginal corporate income tax rateA. 8.67 percent B. 8.00 percent C. 7.60 percent D. 7.33 percent

Question

Michael Anderson

Business

18 April, 07:47

Solve for the weighted average cost of capital. 11.28% = K1 = cost of equity capital for a leveraged firm 1/2 debt-to-total-market-value ratio 8.0% = 1 = before-tax borrowing cost 40.0% - τ - marginal corporate income tax rateA. 8.67 percent B. 8.00 percent C. 7.60 percent D. 7.33 percent

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Answers (1)

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Darien Irwin · Answer 1

WACC = Ke (E/V) + Kd (D/V) (1 - T)

WACC = 11.28 (0.50) + 8.0 (0.5) (1 - 0.40)

WACC = 5.64 + 2.40

WACC = 8.0%

The correct answer is B

Explanation:

WACC equals cost of equity multiplied by proportion of equity in the capital structure plus after-tax cost of debt multiplied by proportion of debt in the capital structure. The proportion of equity and debt in the capital structure are 50% respectively. Ke refers to cost of equity, Kd denotes before tax cost of debt, T represents tax rate, E/V denotes proportion of equity in the capital structure and D/V represents proportion of debt in the capital structure.