Question

A firm requires an investment of $30,000 and borrows $10,000 at 8%. If the return on equity is 14% and the tax rate is 21%, what is the firm's WACC

Answer 1

Answer:

11.466%

Explanation:

WACC = cost of equity x percentage of equity + cost of debt x percentage of debt x (1 - tax rate)

percentage of debt = 10,000 / 30,000 = 0.33

percentage of equity = 1 - 0.33 = 0.67

0.67 x 14% + 0.33 x 8% x (1 - 0.21) = 2.086% + 9.38% = 11.466%