Question

CY Outerspace Inc. has a cost of equity of 8 percent, a pretax cost of debt of 6 percent, and a tax rate of 35 percent. The company's capital structure consists of 55 percent debt on a book value basis, but debt is 45 percent of the company's value on a market value basis. What is the company's WACC?

Group of answer choices

A) 6.16%

B) 5.75%

C) 6.73%

Answer 1

Answer;

Option A 6.16%

Explanation;

Cost of debt(Kd) = 6 % pre tax

Tax rate = 35%

Cost of debt(Kd) post tax = 6% x (1 - tax rate)

= 6% x (1 - 0.35)

= 6% x 0.65

= 3.9%

Cost of equity (Ke) = 8%

Weight average cost of capital = weight of debt(base on market value) x Kd (post tax) + weight of equity (base on market value) x Ke

Weight of debt = 45% base market value

Weight of equity = 1 - debt weight i. E 1 - 45% =55%

So,

Wacc =( 3.9% x0.45) +( 8% x 0.55)

= 1.755% + 4.4%

= 6.155% or 6.16%

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