Suppose that JB Cos. has a capital structure of 78 percent equity, 22 percent debt, and...
Suppose that JB Cos. has a capital structure of 78 percent
equity, 22 percent debt, and that its before-tax cost of debt is 14
percent while its cost of equity is 18 percent. Assume the
appropriate weighted-average tax rate is 21 percent and JB
estimates that they can make full use of the interest tax
shield.
What will be JB’s WACC? (Round your answer to 2 decimal
places.)
Homework Answers
Answer:
Before Tax Cost of Debt =14%
After Tax Cost of Debt = 14% * (1 – 0.21)
After Tax Cost of Debt = 11.06%
Cost of Equity = 18%
Weight of Debt = 22%
Weight of Equity = 78%
WACC = (Weight of Debt * After Tax Cost of Debt) + (Weight of
Equity *Cost of Equity)
WACC = (0.22 * 11.06%) + (0.78 * 18.00%)
WACC = 16.47%
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