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 12 percent while its cost of equity is 16 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?

Answer 1

GIVEN:
We (weight of equity) = 0.78

ke (cost of equity) = 16% or 0.16

Wd (weight of debt) = .0.22

kd (cost of debt) = 0.12

t (tax rate) = 0.21

WACC = [(We x ke) + (Wd x kd) (1-t)]

WACC = [(0.78)(0.16) + (0.22)(0.12) (1-0.21)

]
= [0.1248 + (0.22 * 0.12 * 0.79)]
= 0.1248 + 0.0208= 0.1456

= 14.56%

Explanation: Referred to the solution above.