Take It All Away has a cost of equity of 10.75 percent, a pretax cost of debt of 5.41 percent, and a tax rate of 39 percent. The company's capital structure consists of 75 percent debt on a book value basis, but debt is 35 percent of the company's value on a market value basis. What is the company's WACC

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Business

Melvin Ponce

27 May, 20:33

Take It All Away has a cost of equity of 10.75 percent, a pretax cost of debt of 5.41 percent, and a tax rate of 39 percent. The company's capital structure consists of 75 percent debt on a book value basis, but debt is 35 percent of the company's value on a market value basis. What is the company's WACC

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Thaddeus Barnes · Answer 1

WACC is 8.15%

Explanation:

WACC is the rate of average cost on the basis of the weightage of each capital source like debt, equity and preferred shares. Formula of WACC is as follow:

WACC = (Cost of equity x Weightage of equity) + (Cost of debt (after tax) x Weightage of debt)

As per given dа ta:

Cost of equity = 10.75%

Cost of debt = 5.41% pre tax = 5.41% (1 - 0.39) = 3.3% after tax

WACC = 10.75% x (0.65) + 3.3% (0.35)

WACC = 6.99 + 1.16 = 8.15%