Kelso's has a debt-to-equity ratio of 0

Finance Dec 22, 2020

Kelso's has a debt-to-equity ratio of 0.40 and a tax rate of 35 percent. The firm does not issue preferred stock. The cost of equity is 12.5 percent and the after-tax cost of debt is 4.6 percent. What is the after-tax weighted average cost of capital? 10.24% 8.70% 9.78% 9.34%

Expert Solution

After tax weighted average cost of capital of company=(cost of equity X weight of equity)+(cost of debt * weight of debt)

We will not consider tax rate separately because cost of debt has been provided with after tax.

= (12.5(.1/1.40)+(4.6(.4/1.4)

= (8.928+1.314)

= 10.24%

Correct answer will be option ( A) 10.24%

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