Question

Kelso's has a debt-equity ratio of .62 and a tax rate of 21 percent. The firm does not issue preferred stock. The cost of equity is 16.3 percent and the aftertax cost of debt is 5.21 percent. What is the weighted average cost of capital

Answer 1

Answer:

The weighted average cost of capital of Kelso's is 12.06%

Explanation:

The weighted average cost of capital (WACC) is a measure of the company's cost of capital in which each capital is weighted proportionally.

WACC is calculated by:

D/E = 0.62

E = 1

D = 0.62

V = 1.62

WACC = $\frac{E}{V} * cost of equity + \frac{D}{V} * aftertax cost of debt$

WACC = (1/1.62)(0.163) + (0.62/1.62)(0.0521)

WACC = 0.1206, or 12.06%