Question

Take It All Away has a cost of equity of 10.75 percent, a pretax cost of debt of 5.41 percent, and a tax rate of 39 percent. The company's capital structure consists of 75 percent debt on a book value basis, but debt is 35 percent of the company's value on a market value basis. What is the company's WACC

Answer 1

WACC is 8.15%

Step-by-step explanation:

WACC is the rate of average cost on the basis of the weightage of each capital source like debt, equity and preferred shares. Formula of WACC is as follow:

WACC = ( Cost of equity x Weightage of equity ) + ( Cost of debt ( after tax) x Weightage of debt )

As per given data:

Cost of equity = 10.75%

Cost of debt = 5.41% pre tax = 5.41% ( 1- 0.39) = 3.3% after tax

WACC = 10.75% x (0.65 ) + 3.3% ( 0.35 )

WACC = 6.99 + 1.16 = 8.15%