Oceania Co

Finance Dec 22, 2020

Oceania Co. has a before-tax cost of debt of 4% and cost of common equity of 10%. The company's marginal tax rate is 30%. The company does not have any preferred stock. the company's capital structure has 20% debt and 80% common equity, then Oceania's weighted average cost of capital (WACC) is closest to 0 9.6% O 8.6% 8.8% O 7.8%

Expert Solution

Weight of equity = 1-D/A

Weight of equity = 1-0.2

W(E)=0.8

Weight of debt = D/A

Weight of debt = 0.2

W(D)=0.2

After tax cost of debt = cost of debt*(1-tax rate)

After tax cost of debt = 4*(1-0.3)

= 2.8

WACC=after tax cost of debt*W(D)+cost of equity*W(E)

WACC=2.8*0.2+10*0.8

WACC =8.6%

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