Question

Your firm has a debt value of 830,773 and an equity value of 843,957. Your levered...

Your firm has a debt value of 830,773 and an equity value of 843,957. Your levered cost of equity is 0.17 and your cost of debt is 0.07. Your tax rate is 0.41. What is your weighted average cost of capital?

Correct Answer

0.106 margin of error +/- 0.001

Can someone show the work for this question thanks.

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Homework Answers

Answer #1

Solution:-

Value of the Firm = $830,773 + $843,957

= $1,674,730

Weight of debt(Wd) = 830,773 / 1,674,730

= 0.4961

Weight of Equity(We) = 843,957 / 1,674,730

= 0.5039

The WACC is calculated using the below formula:

WACC = Wd * Kd (1-t) + We * Ke

Where Wd = weight of debt

Kd = Cost of debt = 7%

t = tax rate = 41%

We = Weight of equity

Ke = Cost of Equity = 17%

WACC = 0.4961 * 7% *59% + 0.5039 * 17%

= 0.0204 + 0.0856

= 0.106

Therefore the weigted average cost of capital is 0.106

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