Question

Let's say Capital Theatre has the cost of debt of 10%, the cost of equity of 18%, and the debt ratio of 45% (i.e., the firm finances 45% of the market value of its assets with debt). If the tax rate is 21%, what is the weighted average cost of the firm

Answer 1

The weighted average cost of the firm is 13.46%

Step-by-step explanation:

To calculate the weighted average cost of the firm we have to use the following formula

WACC = After tax Cost of Debt*Weight of Debt + Cost of Equity*Weight of Equity . We have all the details so we can proceed with the formula

WACC = 10%*(1-21%)*45% + 18%*55%

= 13.455%

=13.46%. Weighted average cost of the firm