The school of business tells you the WACC for Realty Assist Inc. is 14%, with the...
The school of business tells you the WACC for Realty Assist Inc. is 14%, with the before-tax cost of debt of 10.77%. The school also tells you the required return on equity is 18%.
You've found that the tax rate is 21%, then what proportion of a firm is equity financed?
|
70.26% |
||
|
54.00% |
||
|
77.78% |
||
|
57.86% |
Homework Answers
Weight of Equity = We
Weight of Debt = Wd
We + Wd = 1
Wd = 1 - WE
WACC = 14%
befor-tax cost of debt = kd = 10.77%
tax rate = t = 21%
Cost of Equity = ke = 18%
WACC is calculated using the formula:
WACC = We*ke + Wd*kd*(1-t)
14% = We*18% + (1-We)*10.77%*(1-21%)
14% = We*18% + (1-We)*8.5083%
14% = We*18% + 8.5083% - We*8.5083%
14% - 8.5083% = We*(18% - 8.5083%)
5.4917% = We*9.4917%
We = 5.4917%/9.4917% = 57.8579179704374% ~ 57.86%
Proportion of equity = We = 57.86%
Answer -> 57.86%
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