If the company's tax rate is 39 percent, what is the WACC?

Question

Skolits Corp. has a cost of equity of 10.6 percent and an aftertax cost of debt of 4.08 percent. The company's balance sheet lists long-term debt of $280,000 and equity of $540,000. The company's bonds sell for 94.3 percent of par and market-to-book ratio is 2.44 times. If the company's tax rate is 39 percent, what is the WACC?

9.25%

9.51%

10.11%

8.81%

8.37%

Answer 1

Weighted Avg. Cost of Capital (WACC)

R(WACC) =. [(Equity / (Equity+Debt) ) x Equity CoC ] + [ (Debt / (Equity+Debt) ) x Debt CoC ]

= [ 540K/(540K+280K) x 4.08% ] + [280K / (280K+540K) x 4.08%] = 8.37%

Note: The problem presents information that is not required for solving for WACC. Given the Debt-to-Value, Equity-to-Value, and Debt/Equity Cost of Capital, the rest of the problem simply involves plugging in the variables into the WACC equation. The rest of the information can be ignored.