Question

Take It All Away has a cost of equity of 10.60 percent, a pretax cost of debt of 5.31 percent, and a tax rate of 40 percent. The company's capital structure consists of 70 percent debt on a book value basis, but debt is 30 percent of the company's value on a market value basis. What is the company's WACC

Answer 1

Answer: 8.38%

Step-by-step explanation:

When calculating Weighted Average Cost of Capital (WACC), use the market values.

WACC:

= (Cost of equity * Proportion of equity) + (After tax cost of debt * Proportion of debt)

If debt is 30% then equity will be 70%.

WACC = (10.60% * 70%) + ( 5.31% * (1 - 40% tax rate) * 30%)

= 7.42% + 0.9558%

= 8.38%