Question

In: Accounting

What is the WACC for a firm with equal amounts of debt and equity financing, a 17% before-tax company cost of capital, a 35% tax rate, and a 10% coupon rate on its debt that is selling at par value?

What is the WACC for a firm with equal amounts of debt and equity financing, a 17% before-tax company cost of capital, a 35% tax rate, and a 10% coupon rate on its debt that is selling at par value?

A. 10.40%

B. 14.25%

C. 15.25%

D. 16.00%

 

Solutions

Expert Solution

What is the WACC for a firm with equal amounts of debt and equity financing, a 17% before-tax company cost of capital, a 35% tax rate, and a 10% coupon rate on its debt that is selling at par value?

C. 15.25%

 

 

Adjustment for tax shield on debt =

D/V interest rate paid tax rate

= .50 .10 .35

= 1.75%

 

WACC =

company cost of capital

- adjustment for tax shield on debt

WACC = 17% - 1.75%

= 15.25%


The WACC for the firm is 15.25%. 

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