Question

Swirlpool, Inc. has found that its cost of common equity capital is 18 percent, and its cost of debt capital is 8 percent. The firm is financed with 60 percent common shares and 40 percent debt. What is the after-tax weighted average cost of capital for Swirlpool, if it is subject to a 40 percent marginal tax rate?

A) 10.37%
B) 12.00%
C) 12.72%
D) 14.00%

Answer 1

The after-tax weighted average cost of capital (WACC) for Swirlpool, Inc. is 12.72%, calculated using the WACC formula considering its cost structure and tax rate.

Step-by-step explanation:

The after-tax weighted average cost of capital (WACC) for Swirlpool, Inc., considering its cost of common equity is 18 percent, its cost of debt capital is 8 percent, a financing structure of 60 percent common shares and 40 percent debt, and a marginal tax rate of 40 percent, can be calculated using the WACC formula:

WACC = E/V * Re + D/V * Rd * (1-Tc)

Where:

• E = Market value of equity (common shares)
• D = Market value of debt
• V = Total market value of the firm (E + D)
• Re = Cost of equity
• Rd = Cost of debt
• Tc = Corporate tax rate

By substituting the given values:

WACC = 0.60 * 0.18 + 0.40 * 0.08 * (1 - 0.40)

WACC = 0.108 + 0.0192 = 0.1272 or 12.72%

Therefore, the correct answer is C) 12.72%