Compute the weighted average cost of capital (WACC) if the pre-tax cost of debt is 5%,...
Compute the weighted average cost of capital (WACC) if the pre-tax cost of debt is 5%, the cost of equity is 10%, the corporate tax rate is 38%, the market value of the firms debt is $120 million, and the market value of the firms equity is %180 million
Homework Answers
After-tax cost of debt=5*(1-tax rate)
=5*(1-0.38)=3.1%
Total market value=(120+180)=$300 million
WACC=Respective costs*Respective weight
=(120/300*3.1)+(180/300*10)
which is equal to
=7.24%
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