Question

The expected return on Simmons Co's common stock is 14.63% and the yield to maturity in the firm’s bonds is 7.6%. The weight of debt and equity is 21% and 79%, respectively. What is RWACC if the tax rate is 34 percent?

A. 12.45%

B. 9.78%

C. 11.65%

D. 12.61%

Answer 1

Weighted Average Cost of Capital (WACC)

The Weighted Average Cost of Capital (WACC) is calculated by using the following formula

Weighted Average Cost of Capital (WACC) = [After Tax Cost of Debt x Weight of Debt] + [Cost of equity x Weight of Equity]

After Tax Cost of Debt = 5.02% [7.60% x (1 – 0.34)]

Cost of equity = 14.63%

Weight of Debt = 0.21

Weight of Equity = 0.79

Therefore, the Weighted Average Cost of Capital (WACC) = [After Tax Cost of Debt x Weight of Debt] + [Cost of equity x Weight of Equity]

= (5.02% x 0.21) + (14.63% x 0.79)

= 1.05% + 11.56%

= 12.61%

“Hence, the Weighted Average Cost of Capital (WACC) for the Project would be 12.61%”