Question

Take It All Away has a cost of equity of 10.54 percent, a pretax cost of debt of 5.27 percent, and a tax rate of 35 percent. The company's capital structure consists of 68 percent debt on a book value basis, but debt is 28 percent of the company's value on a market value basis. What is the company's WACC?

Answer 1

9%

Step-by-step explanation:

WACC is the average cost of capital of the firm based on the weightage of the debt and weightage of the equity multiplied to their respective costs.

According to WACC formula

WACC = ( Cost of common stock x Weightage of common stock ) + ( Cost of preferred stock x Weightage of preferred stock ) + ( Cost of debt ( 1- t) x Weightage of debt )

As WACC is calculated using Market values.

Company Value = 100%

Value of Debt = 28%

Value of Debt = 100% - 28% = 72%

WACC = ( 10.54% x 72% ) + ( 5.27% x 28% )

WACC = 7.59% + 1.48% = 9.07% = 9% (rounded off)