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12 July, 09:47

The following information relates to the a Division of Eco Enterprises:

Interest rate on debt capital: 9%

Cost of equity capital: 13%

Market value of debt capital: $49 million

Market value of equity capital: $79 million

Income tax rate: 40%

On the basis of this information, Atlas's weighted-average cost of capital is closest to (Do not round your intermediate calculations.) :

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  1. 12 July, 12:18
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    Answer: WACC = Ke (E/V) + kd (D/V) (1-T)

    WACC = 13 (79/128) + 9 (49/128) (1-0.4)

    WACC = 8.0234375 + 3.4453125 (0.6)

    WACC = 10.09%

    The weighted average cost of capital of the firm is 10.09%

    Explanation: Atlas's weighted average cost of capital is equal to cost of equity multiplied by the ratio of equity to value of the company plus after-tax cost of debt multiplied by the ratio of debt to value of the company.
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