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The pretax cost of debt is 5% for Phillips Equipment
The pretax cost of debt is 5% for Phillips Equipment. The cost of equity is 10%. The market value of debt is $100,000 and the market value of equity is $200,000. Tax rate is 40%. What is the WACC (weighted average cost of equity) for Phillips Equipment. (round your answer to two decimal places).
Expert Solution
| After tax rate = cost of debt* (1-Tax rate) |
| After tax rate = 5 * (1-0.4) |
| After tax rate = 3 |
| Total Capital value = Value of Debt + Value of Equity |
| =100000+200000 |
| =300000 |
| Weight of Debt = Value of Debt/Total Capital Value |
| = 100000/300000 |
| =0.3333 |
| Weight of Equity = Value of Equity/Total Capital Value |
| = 200000/300000 |
| =0.6667 |
| Cost of Capital = Weight of Debt*Cost of of Debt+Weight of Equity*Cost of of Equity |
| Cost of Capital = 3*0.3333+10*0.6667 |
| Cost of Capital = 7.67% |
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