Question

The following information relates to the a Division of Eco Enterprises:

Interest rate on debt capital: 9%
Cost of equity capital: 13%
Market value of debt capital: $49 million
Market value of equity capital: $79 million
Income tax rate: 40%

On the basis of this information, Atlas's weighted-average cost of capital is closest to (Do not round your intermediate calculations.):

Answer 1

Answer: WACC = Ke (E/V) + kd (D/V)(1-T)

WACC = 13(79/128) + 9(49/128)(1-0.4)

WACC = 8.0234375 + 3.4453125(0.6)

WACC = 10.09%

The weighted average cost of capital of the firm is 10.09%

Explanation: Atlas's weighted average cost of capital is equal to cost of equity multiplied by the ratio of equity to value of the company plus after-tax cost of debt multiplied by the ratio of debt to value of the company.