Question

The Nickel and Copper Store has a cost of equity of 8.6%, a pretax cost of debt of 2.7%, and a tax rate of 35%. What is the firm's weighted average cost of capital if the debt-equity ratio is 0.76?

Answer 1

rate positively ..

	Debt-equity ratio =			0.76
	% of debt = 0.76/(1+0.76)			43.18%
	% of equity = 1/(1+0.76)			56.82%
	Cost of equity =			8.60%
	Pre tax cost of debt =			2.70%
	Tax rate =			35%
	Post tax cost of debt =			1.76%
	2.7%*(1-35%)
	Computation of WACC =			43.18%*1.76%+56.82%*8.6%
				5.64%
	WACC =			5.64%