Take It All Away has a cost of equity of 10.96 percent, a pretax cost of debt of 5.46 percent, and a tax rate of 40 percent. The company's capital structure consists of 72 percent debt on a book value basis, but debt is 38 percent of the company's value on a market value basis. What is the company's WACC?

A) 9.46%

B) 8.87%

C) 7.24%

D) 12.06%

E) 8.04%

Question

Business

Jovanni Good

12 February, 05:54

Take It All Away has a cost of equity of 10.96 percent, a pretax cost of debt of 5.46 percent, and a tax rate of 40 percent. The company's capital structure consists of 72 percent debt on a book value basis, but debt is 38 percent of the company's value on a market value basis. What is the company's WACC?

A) 9.46%

B) 8.87%

C) 7.24%

D) 12.06%

E) 8.04%

+2

Answers (1)

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Naveen · Answer 1

8.04%

Explanation:

The formula to compute WACC is shown below:

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

= (0.38 * 5.46%) * (1 - 40%) + (0.62 * 10.96%)

= 1.24488% + 6.7952%

= 8.04%

The weightage of common equity would be

= 100% - 38%

= 62%

This is the answer and the same is not provided in the given options