S Help Save & ERR Sunt 1 The Two Dollar Store has cost of equity of 12

Finance Dec 01, 2020

S Help Save & ERR Sunt 1 The Two Dollar Store has cost of equity of 12.9 percent. the YIM on the company bonds 52 percent and the tax rate is 40 percent if the company debt- equity ratio is 64, what is the weighted average cost of capital

Expert Solution

Cost of equity = 12.9%

Cost of debt = YTM = 5.2%

Debt/ equity = 64%

Debt/ total capital = 64%/ 164% = 39%

Equity/ total capital = 100%/164% =61%

WACC = Cost of equity x weight of equity + cost of debt (1-tax) x weight of debt

WACC = 12.9% x 61% + 5.2% (1-0.40) x 39%

WACC = 7.869% + 1.2168%

WACC = 9.0858%

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