Question

Suppose that JB Cos. has a capital structure of 78 percent equity, 22 percent debt, and that its before-tax cost of debt is 14 percent while its cost of equity is 18 percent. Assume the appropriate weighted-average tax rate is 21 percent and JB estimates that they can make full use of the interest tax shield.

What will be JB’s WACC? (Round your answer to 2 decimal places.)

Answer 1

To calculate JB's weighted average cost of capital (WACC), use the formula: WACC = (Weight of Equity) x (Cost of Equity) + (Weight of Debt) x (Cost of Debt) x (1 - Tax Rate). Plugging in the given values will give the WACC for JB.

Step-by-step explanation:

To calculate JB's weighted average cost of capital (WACC), we need to consider the cost of equity and the cost of debt. The formula for WACC is:

WACC = (Weight of Equity) x (Cost of Equity) + (Weight of Debt) x (Cost of Debt) x (1 - Tax Rate)

Plugging in the given values: Weight of Equity = 78%, Weight of Debt = 22%, Cost of Equity = 18%, Cost of Debt = 14%, and Tax Rate = 21%

WACC = (0.78) x (0.18) + (0.22) x (0.14) x (1 - 0.21)

Calculating this equation will give us the WACC for JB.