Question

Take It All Away has a cost of equity of 10.72 percent, a pretax cost of debt of 5.39 percent, and a tax rate of 35 percent. The company's capital structure consists of 74 percent debt on a book value basis, but debt is 34 percent of the company's value on a market value basis. What is the company's WACC?

Answer 1

Information provided:

Target weight of debt= 34%

Target weight of equity= 66%

Before tax cost of debt= 5.39%

Cost of equity= 10.72%

Tax rate= 35%

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= 0.34*5.39%*(1- 0.35) + 0.66*10.72%

            = 1.1912 + 7.0752

           = 8.2664%   8.27%

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