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19 November, 09:52

The Five and Dime Store has a cost of equity of 14.8 percent, a pretax cost of debt of 6.7 percent, and a tax rate of 34 percent. What is the firm's weighted average cost of capital if the debt-equity ratio is. 46?

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  1. 19 November, 11:36
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    Answer: WACC = Ke (E/V) + Kd (D/V)

    WACC = 14.8 (100/146) + 6.7 (46/146) (1-0.34)

    WACC = 10.1370 + 1.3932

    WACC = 11.53%

    Explanation: The weighted average cost of capital of the firm is a function of cost of equity and the proportion of equity to the value of the firm plus after-tax cost of debt and the proportion that debt bears to the value of the firm. The deb t-equity ratio is 0.46 (46/100), which implies that debt is 46 while equity is 100. The total value of the company is 146.
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