Question

The Five & Dime store has a cost of equity of 15.8%, a pretax cost of 7.7%, and a tax rate of 35%. What is the firm's weighted average cost of capital if the debt-equity ratio is 0.40?

a. 10.18
b. 11.72
c. 12.72
d. 13.49
e. 14.93

Answer 1

Answer: 12.72%

Step-by-step explanation:

The firm's weighted average cost of capital if the debt-equity ratio is 0.40 will be calculated thus:

= (1 /1+debt equity ratio)(cost of equity) + (Debt Equity ratio/1 + Debt Equity ratio)(Pre-tax cost)(1 - Tax rate)

=(1/1.40)(0.158) + (0.40/1.40)(0.077)(1 - 0.35)

= 12.72%

The firm's weighted average cost of capital is 12.72%