The expected return on Simmons Co's common stock is 14.63 percent and the yield to maturity in the firm's bonds is 7.6 percent. The weight of debt and equity is 21 percent and 79 percent, respectively. What is RWACC (Weighted Average Cost of Capital) if the tax rate is 34 percent? (Choose closest answer if necessary) (A) 12.45% (B) 9.78% (C) 11.65% (D) 12.61%

Question

Sharon Barajas

Business

20 December, 12:35

The expected return on Simmons Co's common stock is 14.63 percent and the yield to maturity in the firm's bonds is 7.6 percent. The weight of debt and equity is 21 percent and 79 percent, respectively. What is RWACC (Weighted Average Cost of Capital) if the tax rate is 34 percent? (Choose closest answer if necessary) (A) 12.45% (B) 9.78% (C) 11.65% (D) 12.61%

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Answers (1)

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Carly Petersen · Answer 1

D. 12.61%

Explanation:

The weight average cost of capital (WACC) is calculated as below:

WACC = After-tax cost of debt x Weight of debt = Cost of equity x Weight of equity.

Note: In this exercise, we will yield to maturity of company's as before-tax cost of debt.

Putting all the number together, we have:

WACC = 7.6% x (1 - 34%) x 21% + 14.63% x 79% = 12.57%, which is closet to option D (12.61%)