The Two Dollar Store has a cost of equity of 10.8 percent, the YTM on the...
The Two Dollar Store has a cost of equity of 10.8 percent, the YTM on the company's bonds is 6.1 percent, and the tax rate is 35 percent. If the company's debt–equity ratio is .55, what is the weighted average cost of capital?
Homework Answers
Weight of equity = 1 / (1 + 0.55) = 0.6452
Weight of debt = 1 - 0.6452 = 0.3548
WACC = Weight of debt*after tax cost of debt + weight of equity*cost of equity
WACC = 0.3548*0.061*(1 - 0.35) + 0.6452*0.108
WACC = 0.01407 + 0.06968
WACC = 0.0838 or 8.38%
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