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A hotel chain has EBIT of $6.9 million. Its unlevered cost of capital is 17.1% and...

A hotel chain has EBIT of $6.9 million. Its unlevered cost of capital is 17.1% and its tax rate is 42%. The firm has debt with both a book and a market value of $4.7 million. This debt has a 3.9% coupon and pays interest annually. What is the firm’s weighted average cost of capital?
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unleveraged cost of capital 17.1%

tax rate 42%

EBIT $6900000
INTEREST$ 269100
EBT $6630900
TAX 42% $2784978
EAT $3845922 For equity

Equity capital

$3845922/17.1%

=$22490772

EQUITY

capital

$22490772

WACC

83%
DEBT $4700000   17%
$27190772

Weighted average cost of capital: We*Ke+Wd*Kd

=.83*17.1%+.17*3.9%

=14.856%

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