Kelso's has a debt-equity ratio of. 6 and a tax rate of 35 percent. the firm does not issue preferred stock. the cost of equity is 14.5 percent and the aftertax cost of debt is 4.8 percent. what is the weighted average cost of capital? 10.86 percent 11.57 percent 10.67 percent 11.38 percent 10.46 percent

Question

Daphne Woodward

Business

20 January, 18:39

Kelso's has a debt-equity ratio of. 6 and a tax rate of 35 percent. the firm does not issue preferred stock. the cost of equity is 14.5 percent and the aftertax cost of debt is 4.8 percent. what is the weighted average cost of capital? 10.86 percent 11.57 percent 10.67 percent 11.38 percent 10.46 percent

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Beckham Briggs · Answer 1

The weighted average cost of capital is calculated as -

WACC = (Weight of common stock X Cost of common stock) + (Weight of preferred stock X Cost of preferred stock) + (Weight of debt X After tax cost of debt)

Weight of debt and equity is calculated as -

Debt =.6 and equity = 1 as debt-equity ratio is 0.6:1

Weight of debt =.6/1.6 = 37.5 %

Weight of equity = 62.5%

Cost of equity = 14.5 % and cost of debt = 4.8% (after tax)

WACC = (62.5% X 14.5%) + (37.5% X 4.8%)

WACC = 10.86 %