Question

Country Cook's cost of equity is 16.2 percent and its aftertax cost of debt is 5.8 percent. What is the firm's weighted average cost of capital if its debt-equity ratio is .42 and the tax rate is 34 percent?

Answer 1

Answer:

WACC= 11.8%

Explanation:

The weighted average cost of capital (WAAC) is the average cost of all the various sources of long-term finance used by a business weighted according to the proportion which each source of finance bears to the the entire pool of fund.

To calculate the weighted average cost of capital, follow the steps below:

Step 1: Calculate cost of individual source of finance

Cost of Equity= 16.2%

After-tax cost of debt = (1- T) × before-tax cost of debt

Already given as 5.8%

Step 2 : calculate the proportion or weight of the individual source of finance

Debt= 42%

Equity = 100-42= 58%

Step 3; Work out weighted average cost of capital (WACC)

WACC = (42%× 5.8%)  +  (58% × 16.2) = 11.8%

WACC= 11.8%