Question

Use the company's financial information below to help answer this question: Market Cap. 3000 Cost of Equity from Security Market Line 16.0% Market Value of Debt Outstanding 2000 YTM on Debt Outstanding 8.0% Effective Tax Rate 30% The company's WACC is closest to: Group of answer choices 9.3% 9.8% 10.6% 11.8% 12.8%

Answer 1

The company's WACC is closest to 11.8%

Step-by-step explanation:

Weighted Average Cost of Capital (WACC) is the Cost to the Company arising from the sources of finance. It shows the return required by holders of permanent capital in the company.

WACC = Cost of Equity x Market Weight of Equity + After Tax Cost of Debt x Market Weight of Debt

where,

Cost of Equity = 16.0 %

Market Weight of Equity = 3,000 ÷ 5,000 = 0.60

Market Weight of Debt = 2,000 ÷ 5,000 = 0.40

After Tax Cost of Debt = interest x ( 1 - tax rate) = 8.0% x (1 - 0.30) = 5.60%

therefore,

WACC = 16.0% x 0.60 + 5.60% x 0.40 = 11.84 %