Corporate Finance - Corporate Finance Section 2

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8. The following data is available for a company:
Cost of debt: 9%
Cost of equity: 12%
Debt-to-equity ratio (D/E): 100%
Tax rate: 30%
The weighted average cost of capital (WACC) is closest to:

  • Option : C
  • Explanation : Wd = (D/E) / (1 + D/E) = 1 / (1 + 1) = 50% We = 1 - Wd = 50% WACC = Wd Rd (1 - t) + We Re WACC = 50% * 9% * (1 - 30%) + 50% * 12% = 9.15%
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9. The following information is available for a firm:
Debt-to-equity ratio: 50%
Tax rate: 30% Cost of debt: 12%
Cost of equity: 19%
The firm’s weighted average cost of capital (WACC) is closest to:

  • Option : B
  • Explanation : Wd = (D/E) / (1 + D/E) = 0.5 / (1 + 0.5) = 33.3%
    We = 1 - Wd = 66.7%
    WACC = Wd Rd (1 - t) + We Re
    WACC = 33.3%* 12%* (1 - 30%) + 66.7% * 19% = 15.47%.
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10. The following information is available for a firm:
Cost of debt: 11%
Cost of equity: 15%
Debt-to-equity ratio (D/E): 50%
Tax rate: 35%
The weighted average cost of capital (WACC) is closest to:

  • Option : C
  • Explanation : Wd = (D/E) / (1 + D/E) = 0.5 / (1 + 0.5) = 33.3%
    We = 1 - Wd = 66.7%
    WACC = Wd Rd (1 - t) + We Re
    WACC = 33.3% * 11% * (1 - 35%) + 66.7% * 15% = 12.39%
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