Question

Wentworth's Five and Dime Store has a cost of equity of 12.1 percent. The company has an aftertax cost of debt of 5 percent, and the tax rate is 39 percent. If the company's debt–equity ratio is .81, what is the weighted average cost of capital? Multiple Choice 7.10% 6.93% 8.05% 8.92% 7.56%

Answer 1

Answer:

8.05%

Explanation:

Calculation of the weighted average cost of capital of Wentworth's Five and Dime Store

Using this formula

WACC=(1/1+debt–equity ratio)(Cost of equity)+( debt -equity ratio/1+debt–equity ratio)(Aftertax cost of debt)(1-tax rate)

Let plug in the formula

WACC = (1/1.81)(.121) + (.81/1.81)(.05)(1 -.39)

WACC= (0.5524)(.121)+ (0.4475)(.05)(0.61)

WACC=0.0668404+0.01364875

WACC=0.080489×100

WACC=8.05% Approximately

Therefore the weighted average cost of capital of Wentworth's Five and Dime Store will be 8.05%