Final answer:
The Weighted Average Cost of Capital (WACC) is calculated using the firm's debt and equity proportions, their respective costs, and the corporate tax rate. Given the rates of return for debt (7%) and equity (11%), and a corporate tax rate of 33%, the WACC for the firm is 9.49% after rounding to two decimal places.
Step-by-step explanation:
The Weighted Average Cost of Capital (WACC) is a calculation that allows a firm to understand the average cost of financing its operations through different sources, including debt and equity. In this particular question, we are given the rates of return for debt and equity, the proportion of debt in the capital structure (24% of debt), and the corporate tax rate (33%).
To calculate WACC, we use the formula:
WACC = (E/V) × Re + (D/V) × Rd × (1 - Tc)
where:
- E = Market value of the firm's equity
- D = Market value of the firm's debt
- V = E + D (Total market value of the firm's financing)
- Re = Cost of equity
- Rd = Cost of debt
- Tc = Corporate tax rate
Assuming that the value of equity is the remainder (100% - 24% = 76%), we can apply these figures to the formula:
WACC = (0.76 × 0.11) + (0.24 × 0.07 × (1 - 0.33))
WACC = 0.0836 + 0.011256
WACC = 0.094856
When rounded to two decimal places, the WACC is 9.49%.