Question

The Two Dollar Store has a cost of equity of 12.6 percent, the YTM on the company's bonds is 5.5 percent, and the tax rate is 39 percent. If the company's debt–equity ratio is .61, what is the weighted average cost of capital?

• 6.86%

• 9.70%

• 7.92%

• 8.64%

• 9.10%

Answer 1

Cost of equity = 12.6%
After tax cost of debt = YTM (1-t)
	5.50 % (1-0.39) = 3.355%
Debt equity ratio = 0.61
Thus for $1 equity, debt = 0.61
Therefore,
Wweights of debts= 0.61/1.61 = 37.89%
Weightd of Equity = 1.00/1.61 = 62.11%
WACC:
Source	Weiughts	Cost	Weighted Average
Debt	0.3789	3.36%	1.27%
Equity	0.6211	12.60%	7.83%
		WACC	9.10%
Answer is 9.10%