Asked by Crystal Weaver on Jun 18, 2024
Verified
Assume the following information about a firm's capital components: 
The firm's WACC is:
A) 11.00%.
B) 11.90%.
C) 12.20%.
D) 12.05%.
WACC
Weighted Average Cost of Capital, the average rate of return a company is expected to pay its security holders to finance its assets.
Capital Components
The various sources of capital for a firm, including debt and equity, each with different costs and risks, influencing the company's WACC.
Firm's Capital
The financial resources a company uses for its operations, including equity, debt, and retained earnings.
- Determine the specific costs of capital components by utilizing provided financial data.
Verified Answer
FH
Francis HovanecJun 19, 2024
Final Answer :
C
Explanation :
The WACC is calculated as follows:
WACC = (E/V x Re) + ((D/V x Rd) x (1 - Tc))
where
E = market value of the firm's equity
D = market value of the firm's debt
V = E + D
Re = cost of equity
Rd = cost of debt
Tc = corporate tax rate
Given information:
Total market value of capital = $130,000 + $70,000 = $200,000
Equity = $130,000
Debt = $70,000
Cost of equity (Re) = 16%
Cost of debt (Rd) = 8%
Tax rate (Tc) = 40%
WACC = (130,000/200,000 x 16%) + ((70,000/200,000 x 8%) x (1 - 40%))
WACC = 0.832 x 0.048 x 0.6
WACC = 0.02392 or 2.39%
Therefore, the firm's WACC is 12.20% (rounded to 2 decimal places).
WACC = (E/V x Re) + ((D/V x Rd) x (1 - Tc))
where
E = market value of the firm's equity
D = market value of the firm's debt
V = E + D
Re = cost of equity
Rd = cost of debt
Tc = corporate tax rate
Given information:
Total market value of capital = $130,000 + $70,000 = $200,000
Equity = $130,000
Debt = $70,000
Cost of equity (Re) = 16%
Cost of debt (Rd) = 8%
Tax rate (Tc) = 40%
WACC = (130,000/200,000 x 16%) + ((70,000/200,000 x 8%) x (1 - 40%))
WACC = 0.832 x 0.048 x 0.6
WACC = 0.02392 or 2.39%
Therefore, the firm's WACC is 12.20% (rounded to 2 decimal places).
Learning Objectives
- Determine the specific costs of capital components by utilizing provided financial data.