The Bigelow Company has a cost of equity of 12 percent, a pre-tax cost of debt of 7 percent, and a tax rate of 35 percent.

What is the firm's weighted average cost of capital if the debt-equity ratio is. 60?

A. 6.58 percent

B. 9.21 percent

C. 10.01 percent

D. 10.13 percent

E. 11.11 percent

B. 9.21 percent

Explanation:

The formula to compute WACC is shown below:

= Weightage of debt * cost of debt * (1 - tax rate) + (Weightage of common stock) * (cost of common stock)

where,

Weighted of debt = Debt : total firm

The total firm includes debt, and the equity which equals to

= 0.60 + 1 = 1.60

So, Weighted of debt = (0.60 : 1.60) = 0.3 75

And, the weighted of common stock = (Common stock : total firm)

= 1 : 1.60

= 0.625

Now put these values to the above formula

So, the value would equal to

= (0.375 * 7%) * (1 - 35%) + (0.625 * 12%)

= 1.71% + 7.5%

= 9.21%