Company A is financed by 28% of debt and the rest of the company is financed by common equity

Finance Dec 22, 2020

Company A is financed by 28% of debt and the rest of the company is financed by common equity. The company's before-tax cost of debt is 4%, and its cost of equity is 14%. If the marginal tax rate is 30%, the company's weighted average cost of capital (WACC) is --. (Note: Write your answer as decimals with three decimal places. For example, if you answer is 8.7%, you should write 0.087 in the answer box. DO NOT write 8.7 in the box as you will be marked wrong)

Expert Solution

Weight of equity = 1-D/A

Weight of equity = 1-0.28

W(E)=0.72

Weight of debt = D/A

Weight of debt = 0.28

W(D)=0.28

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*0.28+14*0.72

WACC =10.86% = 0.109

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