Question

Munding Corp. has debt with a market value of $23 million and equity with a market value of $56 million. Its pre-tax cost of debt is 4% and its cost of equity is 14%. The firm's marginal tax rate is 21%. What is the company's weighted average cost of capital?

Answer 1

The weighted average cost of capital (WACC) is the average rate of return a company needs to earn to meet its financial obligations to debt and equity investors. It is calculated by weighting the cost of debt and the cost of equity by their respective market values. The company's WACC can be calculated as approximately $7.85 million.

Step-by-step explanation:

The weighted average cost of capital (WACC) is the average rate of return a company needs to earn to meet its financial obligations to debt and equity investors. It is calculated by weighting the cost of debt and the cost of equity by their respective market values.

To calculate the WACC, we can use the following formula:

WACC = (Cost of Debt imes (1 - Tax Rate) imes Debt Market Value) + (Cost of Equity imes Equity Market Value)

Given the information provided, the company's WACC can be calculated as follows:

WACC = (0.04 imes (1 - 0.21) imes $23 million) + (0.14 imes $56 million)

WACC = $0.0084 million + $7.84 million = $7.8484 million

Therefore, the company's weighted average cost of capital is approximately $7.85 million.