Question

Take It All Away has a cost of equity of 11.17 percent, a pretax cost of debt of 5.32 percent, and a tax rate of 40 percent. The company's capital structure consists of 65 percent debt on a book value basis, but debt is 31 percent of the company's value on a market value basis. What is the company's WACC? 13.52% 8.11% 8.70% 9.98% 9.36%

Answer 1

Information provided:

Target weight of common equity= 69%

Target weight of debt= 31%

Cost of common stock= 11.17%

Pretax cost of debt= 5.32%

Tax rate= 40%

The weighted average cost of capital is calculated using the below formula:

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

where:

Wd= Percentage of debt in the capital structure.

Kd= The before tax cost of debt

We=Percentage of equity in the capital structure

Ke= The cost of common equity.

T= Tax rate

WACC= 0.31*5.32%*(1-0.40) + 0.69*11.17%

           = 0.9895% + 7.7073%

           = 8.6968%8.70%.

Hence, the answer is option c.           

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