Question

Jubawdit Inc. is a U.S based multinational corporation. The capital structure of this company consists of 65 percent of debt with an interest rate of 21%. Jubawdit stock has a beta of 1.45 and the market return is expected to be at 9%. The risk-free rate is 3% and the corporate tax rate is 30%. What is the weighted average cost of capital (WACC) of Jubawdit Inc?

a. 13.65%

b. 11.70%

c. 12.75%

d. 17.75%

*URGENT HELP.

Answer 1

The WACC is computed as shown below:

= cost of debt x ( 1 - tax rate) x weight of debt + cost of equity x weight of equity

cost of equity is computed as follows:

= risk free rate + beta x ( return on market - risk free rate)

= 0.03 + 1.45 x (0.09 - 0.03)

= 11.7% or 0.117

So, the WACC will be computed as follows:

= 0.21 x (1 - 0.30) x 0.65 + 0.117 x (1 - 0.65)

= 0.09555 + 0.04095

= 13.65%

So, the correct answer is option a.

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