Question

In the spring of last? year, Tempe Steel learned that the firm would need to? re-evaluate the? company's weighted average cost of capital following a significant issue of debt. The firm now has financed 40% of its assets using debt and 60% using equity. Calculate the? firm's weighted average cost of capital where the? firm's borrowing rate on debt is 7.8%, it faces a 35% tax? rate, and the common stockholders require a 19.5% rate of return.

Tempe? Steel's weighted average cost of capital is?

Answer 1

After tax cost of Debt Before tax cost of debt (1-Tax rate) 0.078* (1-0.35) 0.0507 5.07% Weight Cost 0.1950 0.6000 0.4000 1.0000 0.1170 0.0203 0.1373 Debt 0.0507 WACC 13.73%