Question

Eaglet Corporation has the following target and costs associated with its capital structure. Based on these parameters what is Eaglet Corporations weighted average cost of capital?

Target common equity weight:	50 percent
Target debt weight:	50 percent
Cost of equity:	12 percent
Cost of debt:	4 percent
Tax rate:	36 percent

A. WACC = 7.28 percent

B. WACC = 8.00 percent

C. WACC = 5.12 percent

D. WACC = 7.30 percent

Answer 1

A. WACC = 7.28 percent

		Weight	Cost
		a	b	c=a*b
Debt		0.50	2.56%	1.28%
Equity		0.50	12%	6.00%
Weighted Average cost of capital				7.28%
Working:
After tax cost of debt	=	Before tax cost of debt	*	(1- Tax rate)
	=	4%	*	(1-0.36)
	=	2.56%