Question

Suppose that JB Cos. has a capital structure of 75 percent equity, 25 percent debt, and that its before-tax cost of debt is 14 percent while its cost of equity is 18 percent. Assume the appropriate weighted-average tax rate is 25 percent.

What will be JBâs WACC? (Round your answer to 2 decimal places.)

WACC ______ %

Answer 1

16.13%

Step-by-step explanation:

The computation of the weighted cost of capital (WACC) is shown below:

As we know that

WACC is

= weight of equity × cost of equity + weight of debt × before cost of debt × (1 - tax rate)

= 0.75 × 18% + 0.25 × 14% × (1 - 0.25)

= 13.5% + 2.625%

= 16.13%

We simply applied the above formula so that the WACC could be arrive