Question

The weighted-average cost of capital for a firm with a 65/35 debt/equity split, 8% pre-tax cost of debt, 15% cost of equity, and a 35% tax rate is

Answer 1

weighted-average cost of capital is 11.57 %

Step-by-step explanation:

Weighted Average Cost of Capital (WACC) is the return that is required by providers of long term permanent sources of capital.

WACC = Weight of Equity × Cost of Equity + Weight of Debt × After tax cost of debt.

where,

After tax cost of debt = interest × ( 1 - tax rate)

= 8% × (1 - 0.35)

= 5.20 %

Therefore,

WACC = 0.65 × 15% + 0.35 × 5.20 %

= 11.57 %