Homework SourseCountry cooks cost of equity is 162 percent and its after ta
Country cooks cost of equity is 16.2 percent and it’s after tax cost of debt is 5.8 percent. What is the firms weighted average cost of capital if it’s debt equity ratio is .42 and the tax rate is 34%?
Country cooks cost of equity is 16.2 percent and it’s after tax cost of debt is 5.8 percent. What is the firms weighted average cost of capital if it’s debt equity ratio is .42 and the tax rate is 34%?
Solution
Cost of equity = 16.20%
After tax Cost of debt = 5.80%
Debt Equity ratio = 0.42
Weight of debt = 0.42/ (1 + 0.42)
= 29.58%
Weight of equity = 70.42%
Now, WACC is calculated below:
WACC = (70.42% × 16.20%) + (29.58% × 5.80%)
= 11.41% + 1.72%
= 13.12%
firms weighted average cost of capital is 13.12%.
