Question

A firm borrows $500 and its debt-to-equity ratio is 0.7. Its cost of equity and debt are 11% and 7.5%. Its corporate tax rate is 35%. What is its weighted average cost of capital

Answer 1

8.47%

Step-by-step explanation:

WACC = (Cost of equity * Weight of equity) + (Cost of debt capital * Weight of debt capital)*(1 - tax)

WACC = (11*(1/(0.7+1)) + (7.5*(0.7/(1+0.7))*(1-.35)

WACC = (11*0.5882) + (7.5*0.4118*0.65)

WACC = 6.4702 + 2.007525

WACC = 8.477725

WACC = 8.47%

So, the weighted average cost of capital of company is 8.47%.