Afirm requires an investment of $30,000 and borrows $10,000 at 8%. If the return on equity is 15% and the tax rate...

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Answer 1

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Answer #1

Option (D) is correct

Total investment required = $30000

Financed by debt = $10000 , Financed by equity = $30000 - $10000 = $20000

Now, the formula for weighted average cost of capital is:

WACC = w_e * r_e + w_d* r_d * (1 - t) + w_p *r_p

where, w_e = Percentage of equity = $20000 / $30000 = 0.67

w_d = Percentage of debt = $10000 / $30000 = 0.33

r_e = Cost of equity = 15%

r_d = Cost of debt = 8%

t = tax rate = 35%

Now, putting these values in the WACC formula, we get,

WACC = (($20000 / $30000) * 15%) + (($10000 / $30000) * 8% * (1 - 0.35))

WACC = (0.67 * 15%) + (0.33 * 8%* 0.65)

WACC = 10 + 1.7 = 11.7%

Answer 2

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