Question

Take It All Away has a cost of equity of 11.08 percent, a pretax cost of debt of 5.38 percent, and a tax rate of 39 percent. The company's capital structure consists of 68 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?
a. 7.91%
b. 12.97%
c. 9.14%
d. 9.75%
e. 8.43%

Answer 1

Answer:

8.43 %

Explanation:

Weighted Average Cost of Capital (WAAC) is the Cost of long term permanent sources of finance. We consider WACC on the Market Weight of sources of Finance.

WACC = ke × E/V + kd × D/V

where,

ke = cost of equity

    = 11.08 %

E/V = Market Weight of Equity

      = 100 % - 34 %

      = 0.66

kd = cost of debt

    = interest × ( 1 - tax rate)

    = 5.38 % × (1 - 0.39)

    = 3.2818 %

D/V = Market Weight of Debt

      = 0.34

Therefore,

WACC = 11.08 % × 0.66 + 3.2818 % × 0.34

           = 8.43 %