Question

Take It All Away has a cost of equity of 10.99 percent, a pretax cost of debt of 5.44 percent, and a tax rate of 39 percent. The company's capital structure consists of 71 percent debt on a book value basis, but debt is 37 percent of the company's value on a market value basis. What is the company's WACC?

7.51%

12.31%

9.53%

8.94%

8.15%

Answer 1

Information provided:

Target weight of debt= 37%

Target weight of equity= 63%

Before tax cost of debt= 5.44%

Cost of equity= 10.99%

Tax rate= 39%

WACC= wd*kd(1-t)+we*ke

where:

Wd=percentage of debt in the capital structure

We=percentage of equity in the capital structure

Kd=cost of debt

Ke=cost of equity

t= tax rate

WACC= 0.37*5.44%*(1- 0.39) + 0.63*10.99%

           = 1.2278 + 6.9237

           = 8.1515% 8.15%

Hence, the answer is option e.

In case of any query, kindly comment on the solution.