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      Question

      A company has the following capital structure:

      • Cost of Equity = 12% • Cost of Debt = 8% • Debt-to-Equity ratio = 1:1 • Corporate Tax Rate = 30% What is the Weighted Average Cost of Capital (WACC)?
      A 10% Correct Answer Incorrect Answer
      B 9% Correct Answer Incorrect Answer
      C 8.5% Correct Answer Incorrect Answer
      D 11% Correct Answer Incorrect Answer
      E 9.4% Correct Answer Incorrect Answer

      Solution

      Step 1: Determine the weights Since the Debt-to-Equity ratio is 1:1, the capital structure is: • Debt = 50% • Equity = 50% Step 2: Apply the WACC formula           WACC = (E / V) × Re + (D / V) × Rd × (1-Тах) Where: E / V = 0.5 D / V = 0.5 Re = 12% Rd = 8% Тах = 30% WACC = (0.5 × 12%) + (0.5 × 8% × (1-0.3)) = 6% + (0.5 × 8% × 0.7) = 6% + 2.8% = 8.8%  Rounded off, WACC ≈ 9%

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