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A company has outstanding debt with a market value of​ $250M and common stock with a market value of​ $550M. If its debt has a​ before-tax cost of​ 7%, a​ before-tax cost of equity of​ 10% and a corporate tax rate of​ 40%, what is its​ WACC? A. ​8.19% B. ​6.55% C. ​7.86% D. ​5.44%

Respuesta :

TomShelby

Answer:

A. ​8.19%

Explanation:

D  250

E  550

V  800

[tex]WACC = K_e(\frac{E}{E+D}) + K_d(1-t)(\frac{D}{E+D})[/tex]

Ke 0.1

Equity weight 0.6875 (550/800)

Kd 0.07

Debt Weight          0.3125 (250/800)

t 0.4

[tex]WACC = 0.1(0.6875) + 0.07(1-0.4)(0.3125)[/tex]

WACC 8.18750% = 8.19

The taxes doesn't affect the cost of equity. The equity doesn't provide a tax shield like debt. Taxes don't decrease the cost of equity.

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