Question

Consolidated Appliances has a Beta of 0.85, the risk-free interest rate is 2.5%, and the equity risk premium is 5.5%. The yield to maturity on Consolidated Appliances debt is 4.65%. The company is financed 58% with equity, and 42% with debt, and has a tax rate of 21%. What is the WACC for consolidated Appliances?

Answer 1

5.70%

Step-by-step explanation:

The computation of WACC is shown below

But before that first we have to compute after tax cost of debt and the cost of equity which is shown below:

After tax cost of debt is

= 4.65% × (1 - 0.21)

= 3.67%

And, the cost of equity is

= Risk free rate + beta × Market risk premium

= 2.5% + 0.85 × 5.5%

= 7.175%

Now the WACC is

= Weightage of debt × cost of debt + weightage of equity × cost of equity

= 42% × 3.67% + 58% × 7.175%

= 1.54% + 4.16%

= 5.70%