Wentworth's Five and Dime Store has a cost of equity of 117 percent

Finance Dec 01, 2020

Wentworth's Five and Dime Store has a cost of equity of 117 percent. The company has an aftertax cost of debt of 5 percent, and the tax rate 35 percent. If the company's debt-equity ratio 77 what is the weighted average cost of capital

Expert Solution

Cost of equity = 11.7%

After tax cost of debt =5.3%

Debt to equity ratio = 0.77

Debt to assets = weight of debt= 0.77 / 1.77 = 0.4350282486

Equity to assets= weight of equity= 1 / 1.77 = 0.5649717514

WACC = weight of debt × After tax cost of debt + weight of equity × cost of equity

= 0.4350282486 × 5.3% + 0.5649717514 × 11.7%

Weight average cost of capital = 8.915819209%

Weighted average cost of capital = 8.92% (Round off to two decimals)

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