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7. A firm is financed with 20% long-term debt and 80% common stock. Assume that the...

7. A firm is financed with 20% long-term debt and 80% common stock. Assume that the estimated cost of equity is 15% and the cost of comparable debt is 5%. The corporate tax rate is 40%. Compute the WACC.

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Answer #1
Calculation of Cost After Debt
Aftr Tax Cost OF Debt = Interest ( 1 - Tax)
=          5 %       *      ( 1- 0.40)
=          5 %       *      0.60
3.00%
Given,
Cost of Equity = 15%
After Tax Cost of Debt = 3%
CALCUALATION OF WACC  
Particlulars Cost After Tax Weights WACC = ( Weights* Cost after Tax)
Debt 3.00% 20.00% 0.60%
Common 15.00% 80.00% 12.00%
Total 100.00% 12.60%
Answer = WACC = 12.60%
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