Question

Take It All Away has a cost of equity of 10.54 percent, a pretax cost of debt of 5.27 percent, and a tax rate of 35 percent. The company's capital structure consists of 68 percent debt on a book value basis, but debt is 28 percent of the company's value on a market value basis. What is the company's WACC?

12.09%

7.86%

9.67%

9.06%

8.55%

Answer 1

Formula for calculating Weighted average cost of capital is;

WACC = E/V * Cost of Equity + [D/V * Cost of Debt (1- Tax Rate)]

In the above scenario,

Cost of Equity = 10.54

Cost of Debt = 5.27

Tax Rate = 0.35

Weight of Debt taken on Market value basis = 0.28

Weight of Equity = 1- Weight of Debt = 1-0.28 = 0.72

So,By presenting all the given values in the formula,

WACC= (0.72*10.54) + [0.28* 5.27(1-.35)]

= 7.58888+ 0.95914

= 8.5479

WACC of Take it All Away is 8.55% .