Bama Tide Inc typically uses equity as their main source of funding and typically only finances with 20% debt

Finance Dec 02, 2020

Bama Tide Inc typically uses equity as their main source of funding and typically only finances with 20% debt. The firm's after-tax cost of debt has been estimated to be 5% while their after-tax cost of equity is estimated at 10%. If the firm faces a 40% tax rate, what is their WACC?

Expert Solution

Weighted average cost of capital=[cost of equity X weight of equity]+[cost of debt* weight of the debt]

After tax cost of debt, has been given in this case so there is no need for a specific deduction of interest.

= (10*.8)+(5*.2)

= 9%

Weighted average cost of capital of company is 9%.

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