A firm has $5,000 of debt, $16,000 of equity, a cost of debt of 8 percent, and a cost of equity of 12 percent. What is the firm's WACC if there are no taxes?Multiple choice question.9.85%8.95%11.05%11.75%
Question
A firm has 16,000 of equity, a cost of debt of 8 percent, and a cost of equity of 12 percent. What is the firm's WACC if there are no taxes?Multiple choice question.9.85%8.95%11.05%11.75%
Solution
The Weighted Average Cost of Capital (WACC) is calculated by multiplying the cost of each capital component by its proportional weight and then summing:
WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc)
Where: Re = cost of equity Rd = cost of debt E = market value of the firm's equity D = market value of the firm's debt V = E + D = total market value of the firm's equity and debt Tc = corporate tax rate
In this case, there are no taxes, so the formula simplifies to:
WACC = (E/V) * Re + (D/V) * Rd
Substituting the given values:
WACC = (16000/21000) * 0.12 + (5000/21000) * 0.08
WACC = 0.0914285714 or 9.14%
So, the closest answer is 8.95%.
Similar Questions
Q1 A firm has total assets worth $49, 000. lt has borrowed $10, 000 at 8.0%. If its WACC (without tax) is 16.0%, what is the firm's cost of (levered) equity capital? The firm's cost of equity capital is places. ???%. (Round to 2 decimal)
An analyst gathers the following information about a company's capital structure:Debt (tax-deductible) 40%Equity 60%Before tax cost of debt 4%Cost of equity 9%If interest is tax-deductible and the marginal tax rate is 30%, the company's WACC is closest to:A.5.51%.B.6.52%.C.7.00%.
For a company that pays no corporate taxes, its WACC will be equal to:Select one:a.the expected return on it assets.b.the expected return on its debt.c.the total value of its assets.d.the expected return on its equity.
In case the firm is all-equity financed, WACC would be equal to:Options :Cost of debtCost of equityNeither A nor BBoth A and B
The WACC is the weighted average cost of Blank______ plus the weighted average cost of Blank______.Multiple choice question.debt; equitycapital; fundslong-term debt; short-term debtcommon stock; equity
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.