Question

Swirlpool, Inc. has found that its cost of common equity capital is 18 percent, and its cost of debt capital is 8 percent. The firm is financed with 60 percent common shares and 40 percent debt. What is the after-tax weighted average cost of capital for Swirlpool, if it is subject to a 40 percent marginal tax rate?

Answer 1

12.72%

Step-by-step explanation:

The formula to compute WACC is shown below:

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

= (0.40 × 8%) × ( 1 - 40%) + (0.60 × 18%)

= 1.92% + 10.8%

= 12.72%

Simply we multiply the capital structure weighatge with its cost so that the correct cost of capital can come.