Brown Street Grocers has a cost of equity of 11.8 percent, a pre-tax cost of debt of 6.9 percent, and a tax rate of 35 percent. What is the firm's weighted average cost of capital if the debt-equity ratio is 0.6? a. 11.80 percent b. 2.08 percent c. 9.70 percent d. 8.44 percent e. 9.06 percent

The correct answer to the following question is option E) 9.06%.

Explanation:

Here the cost of equity given is - 11.8%

Pre tax cost of debt - 6.9%

Tax rate - 35%

So the after tax cost of debt - 6.9% x 65%

= 4.485%

The debt to equity ratio -.6

So the weight of debt -.6 / (1 +.06)

=.375

Weight of equity - 1 / (1 +.06)

=.625

Weighted average cost of capital =

Debts cost x weight of debt + Equity cost x weight of equity

= 4.485 x. 375 + 11.8 x. 625

= 1.681875 + 7.735

= 9.06%