Question

Take It All Away has a cost of equity of 10.81 percent, a pretax cost of debt of 5.45 percent, and a tax rate of 35 percent. The company's capital structure consists of 77 percent debt on a book value basis, but debt is 37 percent of the company's value on a market value basis. What is the company's WACC

Answer 1

8.12%

Step-by-step explanation:

The computation of the weighted average cost of capital is shown below:

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

= 10.81% × 0.63 + 5.45% × (1 - 0.35) × 0.37

= 6.81% + 1.31%

= 8.12%

We simply applied the above formula by considerin the capital structure with its weight so that the correct percentage could come