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11 January, 15:28

Dicey Investments, Inc. has a debt/equity ratio of 2.0. If it had no debt, its cost of equity would be 13%, while Its pre-tax cost of debt is 10%. Assuming that Dicey has no changes in its credit ratings and that its marginal tax rate is 30%, what is its after-tax WACC?

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Answers (2)
  1. 11 January, 15:40
    0
    Answer: 9%
  2. 11 January, 15:43
    0
    = 9%

    Explanation

    The weighted Average cost of Capital (WACC) is the average cost of capital for the different sources of long-term capital available to a firm weighted according to the proportion each source of finance bears to the total capital in the pool.

    The after tax WACC will be computed as follows

    Step 1

    Compute the after-tax cost of debt

    After-tax cost of debt =

    =10% * (1-0.3)

    =7%

    Note : observe that this lower than the before tax cost, this is due to the tax savings on interest cost

    Cost of equity = 13%

    Debt equity ratio = 2:1

    Step 2

    Calculate the WACC

    WACC = ((13% * 1) + (7%*2)) / 3

    = 0.09 * 100

    = 9%
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