Take It All Away has a cost of equity of 11.17 percent, a pretax cost of debt of 5.32 percent, and a tax rate of 40 percent. The company's capital structure consists of 65 percent debt on a book value basis, but debt is 31 percent of the company's value on a market value basis. What is the company's WACC

Question

Business

Aliza Ball

10 June, 04:24

Take It All Away has a cost of equity of 11.17 percent, a pretax cost of debt of 5.32 percent, and a tax rate of 40 percent. The company's capital structure consists of 65 percent debt on a book value basis, but debt is 31 percent of the company's value on a market value basis. What is the company's WACC

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Aliya Werner · Answer 1

WACC = (Ke*E+D*Kd) / (E+D)

Explanation:

Ke (Cost of Equtiy) = 11.17%

Kd (Cost of Debt) = 5.32%

E (Market value of Equity) = ?

D (Market Value of Debt) = 65

If D market value is 31% of Total Market value of company so by grossing up D We get E+D=65/.31=210. So E=210-65=145

WACC = (Ke*E+D*Kd) / (E+D)

WACC = (11.17%*145+65*5.32%) / (145+65)

WACC = (16.2+3.5) / (210)

WACC=9.36%