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14 October, 10:08

Let's say Capital Theatre has the cost of debt of 10%, the cost of equity of 18%, and the debt ratio of 45% (i. e., the firm finances 45% of the market value of its assets with debt). If the tax rate is 21%, what is the weighted average cost of the firm

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  1. 14 October, 10:30
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    The weighted average cost of the firm is 13.46%

    Explanation:

    To calculate the weighted average cost of the firm we have to use the following formula

    WACC = After tax Cost of Debt*Weight of Debt + Cost of Equity*Weight of Equity. We have all the details so we can proceed with the formula

    WACC = 10% * (1-21%) * 45% + 18%*55%

    = 13.455%

    =13.46%. Weighted average cost of the firm
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