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Homework answers / question archive / The pretax cost of debt is 5% for Phillips Equipment

The pretax cost of debt is 5% for Phillips Equipment

Finance

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).

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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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