Question

Taylor s has a beta of .78 and a debt-to-equity ratio of .2. The market rate of return is 10.6 percent, the tax rate is 34 percent, and the risk-free rate is 1.4 percent. The pretax cost of debt is 6.1 percent. What is the firm's WACC

Answer 1

Answer: 7.82%

Step-by-step explanation:

Given the following :

Beta (B) = 0.78

Debt to equity ratio = 0.2

Market rate of return (Rm) = 10.6% = 0.106

Tax rate (T) = 34% = 0.34

Risk free rate (Rf) = 1.4% = 0.014

Pretax cost of debt (Kd) = 6.1% = 0.061

WACC =

Cost of equity (Ke) = Rf + (Rm - Rf) * B

Ke = 0.014 + (0.106 - 0.014) * 0.78

Ke = 0.014 + (0.092)*0.78

Ke = 0.014 + 0.07176

Ke = 0.08576

Equity (E) = 1

Debt (D) = 0.2

Total volume of company's finance (V) = 1+0.2 = 1.2

WACC = (E/V)*Ke + (D/V)*(1 - T)*Kd

WACC = [(1/1.2)*0.08576] + [(0.2/1.2)*(1 -0.34)*0.061

WACC = [0.0714666 + 0.00671]

WACC = 0.0781766 = 0.0782 = 7.82%